Some folks in the District of Columbia, including some folks on the D.C. Council, would like to decouple D.C. from the new federal estate tax law. That would be a mistake. I say that not because I care about people who have more than $11 million in assets, but rather that state estate taxes do not work very well—especially in the District.
Before the Federal Tax Cuts and Jobs Act, the exemption for an individual was $5.6 million. The D.C. Council had, as part of the District’s tax reform effort, tied the D.C.’s exemption to the federal exemption. That was generally a good policy move. The District’s exemption had been a mere $1 million. The D.C. Council then raised the exemption and tied it to the federal law. Congress then doubled the exemption. It is tempting to want to tax dead rich people. They are, after all, dead and rich. It seems politically more expedient to take their money than, say, the money of people who work and vote.
But the D.C. Council should resist this temptation. Put aside the politics of envy and questions of whether people are paying their fair share: Philosophically, the differing sides will rarely agree. The problem is that the estate tax does not work effectively or efficiently. People who have a lot of money and will be subject to the tax will move. And they need not move to sunny Florida or Texas to avoid the tax; they can—and do—move to Virginia. If you are elderly and rich, you can move your legal residence to Arlington or Alexandria with minimal disruption. You can keep your friends, your church, and your membership at your tony country club. The costs of moving are simply not that high. I know several lawyers who counsel clients to do just that. Think about it: If you have a taxable estate worth $10 million, moving to Virginia will save you over $1 million. Decreasing the exemption will only provide more incentive.
There is another problem. When rich folks leave, the city will not only lose the estate tax revenue—it will lose other revenue as well. Those rich folks pay income, sales, and excise taxes. A recent study found that Minnesota actually lost money by having an estate tax. Those rich folks who leave don’t pay any taxes.
Those on the Council who are in favor of the change think that decoupling will produce millions in new revenue. They would like to spend the anticipated windfall on helping victims of domestic violence, alleviating homelessness, and other worthwhile services. But any projected new income ignores the likelihood of more people leaving.
Only 12 states and the District still impose an estate tax. Many blue states, like California, don’t. In some cases, there is simply opposition to taxing people at death. But in most, the decision was made to prevent the wealthy—and the wealth—from fleeing altogether.
David Brunori, who writes the regular column First Take, is a partner in the Washington office of Quarles & Brady LLP and a research professor of public policy at The George Washington University. He is a nationally known expert in state and local tax and public finance. He also serves as a commissioner on the District’s Tax Revision Commission.