The Tax Foundation posts a new map of state inheritance and estate taxes, with commentary by TF analyst Janelle Cammenga. A quick glance at the map below shows the majority of states levy neither tax.
Washington is an outlier, not only because it levies an estate tax but also because it levies it at the highest rate in the nation. TF writes,
In addition to the federal estate tax, with a top rate of 40 percent, some states levy an additional estate or inheritance tax. Twelve states and the District of Columbia impose estate taxes and six impose inheritance taxes. Maryland is the only state to impose both.
Hawaii and Washington State have the highest estate tax top rates in the nation at 20 percent. Eight states and the District of Columbia are next with a top rate of 16 percent. Massachusetts and Oregon have the lowest exemption levels at $1 million, and Connecticut has the highest exemption level at $7.1 million.
At least one proposal aims to increase taxes on wealthy people’s estates that they pass on when they die. House Bill 1465, sponsored by state Rep. Tina Orwall, D-Des Moines, would increase the tax rate on estates valued at $3 million or more. While right now the highest tax rate applied to wealthy people’s estates is 20%, Orwall’s proposal would increase the maximum tax rate to 40%, which would apply to estates worth at least $1 billion.
Other changes to the estate tax may be proposed as the legislative session continues. Lawmakers may also introduce new taxes as they flesh out a new two-year state operating budget later this spring.
While most attention has shifted to a proposed capital gains tax, as Santos writes, until the budget is adopted and lawmakers adjourn, taxes remain in play. So it’s worth noting Cammenga’s analysis for the Tax Foundation,
Most states have been moving away from estate or inheritance taxes or have raised their exemption levels, as estate taxes without the federal exemption hurt a state’s competitiveness. Delaware repealed its estate tax at the beginning of 2018. New Jersey finished phasing out its estate tax at the same time, and now only imposes an inheritance tax.
Connecticut continues to phase in an increase to its estate exemption, planning to match the federal exemption by 2023. However, as the exemption increases, the minimum tax rate also increases. In 2020, rates started at 10 percent, while the lowest rate in 2021 is 10.8 percent. Connecticut’s estate tax will have a flat rate of 12 percent by 2023.
Vermont also continued phasing in an estate exemption increase, raising the exemption to $5 million on January 1, compared to $4.5 million in 2020.
The District of Columbia moved in the opposite direction, lowering its estate tax exemption from $5.8 million to $4 million in 2021, but simultaneously dropping its bottom rate from 12 to 11.2 percent.
Estate and inheritance taxes are burdensome. They disincentivize business investment and can drive high-net-worth individuals out-of-state. They also yield estate planning and tax avoidance strategies that are inefficient, not only for affected taxpayers, but for the economy at large. The handful of states that still impose them should consider eliminating them or at least conforming to federal exemption levels.