Forbes | by Ashlea Ebeling
Despite facing a $400 million budget hole, Delaware is the latest state to repeal its estate tax—as of Jan. 1, 2018. Democratic Governor John Carney Jr. signed a stand-alone estate tax repeal bill today, just two days after signing the 2018 state budget, which includes tax hikes on real estate transfers, tobacco and alcohol.
“The very wealthy don’t have to move down to Florida,” says Jocelyn Borowsky, an estate lawyer with Duane Morris in Wilmington, Del. The thinking is that if wealthy folks stay in Delaware–instead of changing residency to avoid the state estate tax–they’ll help the state’s coffers by paying personal income taxes.
“We came to the realization that it was absolutely necessary to do [estate tax repeal] because we were losing more in income tax than what we would gain in estate tax,” says Rep. Mike Ramone, the bill’s primary sponsor and a small business owner.
In a 2015 report the Delaware Economic and Financial Advisory Council on Revenues called the estate tax a “small, volatile source of tax revenue” and recommended repeal, based in part on its negative influence on personal income tax revenues. (The Council recommended replacing it with a small increase in the personal income tax—that didn’t make it into the final budget.) The estate tax brought in a high of $16.2 million in 2011, a low of $1.3 million in 2014, and $9.3 million last year.
The state estate tax was put in under Democratic Governor Jack Markell in 2009 as a temporary tax when the budget hole was $800 million. Its exemption amount is tied to the federal estate tax exemption, so it kicks in this year for individuals who die with more than $5.49 million in assets (the top rate is 16%). The federal tax is 40%.
“It was a failed effort to pick up some revenue,” says Peter Gordon, a Wilmington estate lawyer who says he was part of a group of lawyers who called themselves “The Repeal Group.” He cites the estate tax as the impetus for at least 10 wealthy clients who changed their residency to no-income-tax states (like Florida) where they had second homes. They made their case to Governor “Governor Carney got it,” Gordon says.
For 2017, there are 18 states plus the District of Columbia that impose either estate or inheritance taxes or both. The Delaware change will make that 17 states plus D.C. for 2018. New Jersey’s estate tax is also a goner as of Jan. 1, 2018, but its inheritance tax remains on the books. Other states that did away with estate or inheritance taxes include Tennessee (2016); North Carolina and Indiana (2013); Kansas, Ohio, and Oklahoma (2010).
In Delaware, 10 Democrats voted for repeal in the House, and three in the Senate. Fellow Democratic Rep. John Kowalko, in an opinion piece in The News Journal, called their votes “betrayal” and said that estate tax repeal victimizes the state’s needy at the expense of the wealthy.