Why repealing the estate tax is bad for Connecticut residents

Connecticut is facing financial distress with mounting underfunded public pension liabilities and chronic budget shortfalls. Any further foregone tax revenues will likely be recouped at the expense of programs benefiting middle- and lowerincome residents.

Yet a recent proposal to repeal the estate tax went before the Connecticut General Assembly’s Finance, Revenue & Bonding Committee. This myopic proposal would exacerbate Connecticut’s budget problems and rising income-inequality, while benefiting only the wealthiest 1 percent of Connecticut residents. In contrast, keeping the estate tax would ensure that those fortunate enough to have accumulated significant wealth will pay their share for the schools, roads, health care, and other investments that help our communities thrive.

The estate tax is a substantial and stable source of revenue for Connecticut, bringing in an average of $221 million per year over the past three years. Even with the exemption scheduled to increase next year, the tax is projected to raise $155.8 million of badly needed revenues.

While opponents of the estate tax fear that it might cause millionaires to migrate to states with lower taxes, there is no credible evidence to support this claim. In fact, Connecticut would be breaking ranks with almost every one of its peer states if it chooses to abolish its estate tax. New York, New Jersey, Rhode Island, Massachusetts, Vermont, Maine, Pennsylvania, and the District of Columbia all have estate or inheritance taxes.

Connecticut completely exempts smaller estates from any taxation, and the exemption threshold is slated to increase from $2.6 million to

$11.4 million over the next five years. By

2023, Connecticut will have one of the largest estate tax exemptions among its peer states. Additionally, Connecticut is the only one of these states that caps the total amount of estate tax paid.

The progressivity of the estate tax is also well-equipped to address the top-heavy economic growth in the country in the last decade. Inequality has become especially pronounced in Connecticut, the third most unequal state in the country, where the wealthiest 1 percent of the population takes home 27.3 percent of all income. The Department of Revenue Services estimated that the gift and estate taxes fell on less than 1 percent of Connecticut households in 2011, and only 656 filers paid the estate tax in 2018, when the exemption was $2.6 million. This number will surely shrink as the exemption level continues to rise.

Much of the wealth in these large estates will go untaxed if not for the estate tax. Capital gains tax is due only on the “realized” appreciation of assets. The appreciation is never subject to income tax if the owner holds on to the asset until death. If one dies without selling these assets, they can be passed to heirs on a “stepped-up” basis, meaning when the heirs sell the stock, the calculation of capital gains is based on the value of the assets when they received it. Without the estate tax, assets can be bequeathed to and cashed by the inheritors tax free. Nationally, unrealized capital gains account for 32 percent of estates worth between $5 million and $10 million and 55 percent of the value of estates worth more than $100 million.

Some critics contend that the estate tax hurts small and family owned farms and businesses. However, the tax code allows farm real estate to be valued at farm-use rather than fair-market value, significantly reducing the probability that an estate tax will be levied on these properties. The USDA estimated that in 2017 less than 0.8 percent of farm-estates nationwide would have to pay an estate tax. Furthermore, the Tax Policy Center estimates that in 2013 less than 0.16 percent of estates paid the federal tax, and only 20 of these estates owned family farms or small businesses. Small businesses paying the estate tax will become even more unlikely under the increased exemption of $11.2 million under the Tax Cuts and Jobs Act.

Connecticut should not mortgage the future of its children, further increase income and wealth inequality, and break ranks with almost every one of its peer states in order to provide a tax break for the wealthiest 1 percent of Connecticut residents.

Inequality has become especially pronounced in Connecticut, the third most unequal state in the country, where the wealthiest 1 percent of the population takes home 27.3 percent of all income.