Policymakers have critical decisions to make this legislative session. Will they make sustainable tax and budget choices that prioritize the concerns of everyday Minnesotans, like being able to afford child care, a college education and other keys to family economic security? Or will they pass large tax cuts for just a few instead?
Thinking about those choices, it is clear that the estate tax cuts in the House omnibus tax bill shouldn’t be a priority this session. This provision would crowd out more important priorities, provide large tax cuts to only a small number of Minnesota estates, and create uneven tax treatment among Minnesota taxpayers.
Minnesota has already substantially cut the estate tax. Changes passed last year have cut the estate tax by $112 million in FY 2016-17. The cost of these cuts grows each year as the amount of an estate exempted from the tax grows to $2 million by 2018. For certain family-owned businesses and farms, estate value up to $5 million is already exempt. Only about 800 large estates are expected to pay the estate tax in 2015.
The House omnibus tax bill (House File 848) would go further, raising the exemption amount over time to more than $5 million and increasing it each year.
The cost of the House’s estate tax provision is $61 million in FY 2016-17, $123 million in FY 2018-19 and even more in future years.
The House tax bill takes up all of the state’s projected surplus and more, preventing the House from making much progress on issues that matter to many working Minnesotans, such as affordable child care and higher education, and funding our schools. If estate tax cuts are included in the final tax bill, that will crowd out other tax provisions focused on lower- and middle-income Minnesota families.
Cuts to the estate tax reach only a small number of the largest estates and primarily benefits high-income individuals. This would reverse course on the remarkable progress Minnesota has made in the last two years to make the distribution of state and local taxes more even across income levels. It is still the case that the highest-income Minnesotans pay a smaller share of their incomes in state and local taxes than other Minnesotans, and estate tax cuts would widen the gap.
Another problem with this proposal is that it undercuts the estate tax’s important role in creating a level playing field among taxpayers. The estate tax serves as a backstop to the income tax, as it applies to the increased value of assets, such as stocks, that otherwise would not be taxed. But the more we erode the estate tax, the more unrealized capital gains in large estates will go untaxed.
That’s a tax benefit that isn’t available to Minnesotans with incomes only from wages or from capital gains that they realize during their lifetimes.
And the amount of unrealized capital gains in large estates is significant. The Center on Budget and Policy Priorities finds that nationally, unrealized capital gains are about one-third of estates worth between $5 and $10 million, and are 55 percent of the value of estates worth more than $100 million.
Proponents of this provision argue that these cuts are needed to reduce the migration of Minnesotans to other states with lower or no estate taxes. However, estate tax policies have only a modest impact at best on where people choose to live. And these provisions don’t pay for themselves: the revenue gained by keeping a small number of households from moving is smaller than the revenue lost from substantially cutting the estate tax.
Minnesota has already done a great deal in the last two years to simplify our estate tax. Governor Dayton’s budget and the Senate tax bill include a few provisions to make the estate tax work more smoothly but without the significant revenue loss that crowds out other critical priorities. That reflects a wiser path for policymakers to take this session.