Progressive Voices

Seven out of a thousand. No, that’s not the odds that the state capitol will return to the town of Edenton where it was originally. It’s the percent of deaths in North Carolina that result in estate tax liability. That’s according to a new study by the Institute on Taxation and Economic Policy. The study looked at the number of estates in each state that were subject to an estate tax in 2006. In that year, the latest for which data is available, 523, less than 1%, of the North Carolinians that died left behind estates that were subject to tax.

Under current law, estates valued at more than $2 million for individuals and $4 million for couples are subject to the federal estate tax. The tax is paid only on the portion of the estate that exceeds the minimum minus anything left to a spouse or given to charity. The rate schedule is then graduated, ranging from 18% for the initial amount of taxable wealth to 46% on the very highest amounts.

The federal government established the estate tax in 1916 to “break up the swollen fortunes of the rich,” according to FDR. Federal and state estate taxes have played an important role in reducing the passage of concentrated wealth from one generation to the next. This function is as important today as it was back then. The wealth gap between the rich and the poor in the United States is at its greatest level since 1929. The wealthiest 1% of Americans own roughly one-third of the wealth nationwide - more than the poorest 90 percent put together.

Over the last several years the federal government has been slowly phasing out the federal estate tax by increasing the minimum amount of estate required before a tax is owed and reducing the top rate. Under a bizarre scenario, the tax is slated to disappear entirely in 2010 but then return in 2011 with the exemption level and rates that were in place before the phase-out began – that is at $1 million and 55% respectively.

Over the course of a lifetime, wealthy taxpayers can amass a significant amount of wealth that goes largely untaxed. Unrealized capital gains are never captured by state or federal income taxes. And even when capital gains are realized, they are taxed at a rate of 15%, a rate far lower than what most Americans pay on their earnings.

With the recent shift in the makeup of Congress and the ballooning federal deficit, virtually no one thinks that the tax will be permanently repealed. And when asked, most Americans favor reforming rather than repealing the tax on inherited wealth. This position makes sense.

Acknowledging that the estate tax will probably not be allowed to disappear as planned, discussions in Washington are ongoing about the best way to reform the tax. It is important to maintain a high exemption amount such as the $2 million exemption currently in place so that the middle class is not impacted. It’s also a good idea to apply a high top marginal rate that would only apply to the largest estates. Finally, the credit for payment of state estate taxes should be reinstated to encourage states to maintain and enact their own estate taxes as well.

North Carolina’s leaders should be praised for not giving in to calls to eliminate its estate tax. There has been considerable pressure to do so since the federal government stopped allowing taxpayers to claim a credit against their federal estate tax bills for anything paid to the state. For in-state tax purposes, if an estate is not subject to the federal estate tax then North Carolina does not impose its own tax. But for estates that are taxable, North Carolina imposes a tax that is set at the amount of the federal credit that was allowed before the phase-out began.

Coincidentally, this month Forbes magazine released its annual list of billionaires, four of whom call the Tar Heel state home. Two of North Carolina’s billionaires are “self-made” and two of them inherited fortunes upon which they have built even greater ones. May each of them enjoy the fruits of their labor (or their ancestors’ labor as the case may be). In turn, when they are no longer with us, the society in which they prospered should benefit along with their heirs. In doing so, we strengthen our democracy and help to create more just starting line for the next generation of Americans as they pursue their own fortunes.

Elaine Mejia is the Director of the N.C. Budget and Tax Center

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This entry was posted on Monday, March 24th, 2008 at 1:05 am and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.