Why lawmakers from both parties want to change Minnesota’s estate tax

CORBIS

A little bit of marketing can go a long way in politics.

Take Minnesota's estate tax: Supporters of nixing or reducing the somewhat lesser-known source of state revenue like to call it, ominously, a “death tax,” because it hits the estates of wealthy Minnesotans after they die. But those against tinkering with the tax, which can bring hundreds of millions of dollars into state coffers, have an equally pithy sales pitch: They say supporters are making Minnesota’s “dead rich people” their number one priority.

The rhetoric in St. Paul has raised the profile of the tax, despite the fact that it accounts for just one percent of state revenues every two years and affects less than two percent of estates in Minnesota in any given year. And the debate over the tax is only expected to heat up in coming weeks, as lawmakers debate dozens of possible proposals to cut the tax, each of which would require a chunk of the $1.9 billion budget surplus to pay for.

“It costs hundreds of millions of dollars that could be used for a lot of other things, and it only benefits a few very wealthy people,” said Rep. Ryan Winkler, DFL-Golden Valley, a view that echoes that of many opponents. “It’s definitely a bill that seems to favor inherited wealth, and it doesn’t seem like that should be our top priority.” 

Yet there are members of both parties who would like to see changes to the current law. More than a dozen bills to change the current structure of the tax have been introduced by various Republican and DFL legislators, who argue that the debate is more complicated than just whether or not dead affluent people should pay extra taxes.

Rep. Greg Davids
State Rep. Greg Davids

“The estate tax to me is an evil tax, because somebody died and you tax them again — that’s not very Minnesota nice,” said Greg Davids, R-Preston, the Republican chairman of the House Taxes Committee. “I’ve never liked the estate tax, I see no purpose for it. I don’t care how much money someone has or makes as long as it’s done legally. That should not be the business of government, we should encourage people who are financially successful, not discourage them.”

How Minnesota’s estate tax works

Minnesota’s current version of the estate tax applies to the estates of those who die with more than $1.4 million in property. Thanks to a 2014 law change, that threshold will gradually go up to $2 million by 2018, but that still leaves a huge gap between the state and federal law.

At the federal level, the estate tax kicks in only if a gross estate is worth more than $5.4 million. According to a March 2014 review on estate taxes from the Department of Revenue, there were 1,141 Minnesota decedents who paid Minnesota's estate tax in 2012, though only 36 of those paid the federal estate tax in 2012, so only 3.2 percent of residents with Minnesota estate tax liability also had to pay the federal tax.

Minnesota's estate tax rate is anywhere between 9 and 16 percent, depending on the size of the estate. If a resident’s estate is worth between $1.4 million and $3.6 million whey they die, their estate will be taxed at the 10 percent rate, while estates estimated at more than $10.1 million are taxed at the 16 percent rate. There were 2,200 estate tax returns filed in 2013, which allowed Minnesota to collect about $159 million in revenue that year. In 2014, that figure went up to about $177.5 million. By 2017 that number is projected to grow to $219 million.

James Binger
Robina Foundation
James Binger

The estate tax is considered one of the most progressive state taxes, but it’s also one of the most unpredictable, since it depends entirely on how many affluent people die during the course of a year. Case in point:  When former Honeywell CEO James Binger died in 2004, the state of Minnesota took in $112 million off of his massive estate alone, helping to push tax receipts above forecasts for 2005. But the state only collected on average $80 or $90 million in estate taxes total in the years before Binger’s death, and sometimes far less if there were no large estates in the mix. Another reason for the unpredictability: the tax hits those who can most afford to find ways to minimize their tax liability.

Before the early 2000s, most states had some form of an estate tax, thanks in no small part to a federal government credit for state estate taxes, which effectively paid a large portion of the taxes for the states. When the federal credit was repealed in 2001, most states chose to eliminate their estate taxes.

Today, 31 states no longer have an estate or inheritance tax, while 12 states — including Minnesota — have retained them, according to Minnesota House Research. Five other states have no estate tax but do have inheritance taxes, which kick in based who inherits the money, not on how much property someone owns when they die. 

Few states have inheritance or estate taxes
After the federal government eliminated dollar-for-dollar deductibility of state estate and inheritance taxes in 2001, most states repealed those taxes. Minnesota is one of just a handful of states that still imposes a state-level estate tax.
  • tag No estate or inheritance tax
  • tag Estate tax
  • tag Inheritance tax
  • tag Estate tax and inheritance tax
Source: MN House Research [PDF]

Minnesota has made several changes to its law since 2001. Because the value of many farm estates can exceed $1 million, in 2011 legislators passed a law allowing qualifying businesses or family farms to get a $4 million Minnesota estate tax exclusion. Then, in 2013, lawmakers tightened estate laws, requiring any large gifts made in the three years immediately prior to a person’s death to be included in the estate (and therefore taxable). 

Is the estate tax causing people to flee Minnesota?

The current crop of bills seeking to change the estate tax run the gamut, though the vast majority simply aim to make it more in line with state and federal tax law. Rep. Ron Erhardt, DFL-Edina, has authored a bill to increase the threshold for the estate tax by $1 million a year until it hits the federal level, which would cost the state more than $150 million in the next budget.

Rep. Ron Erhardt
State Rep. Ron Erhardt

For his part, Erhardt gets some amusement when he hears the “dead rich people” line from members of his own party. “I do think it’s funny,” he said. But he’s also worried elderly people are moving out of his affluent suburban community and into other states to avoid things like the estate tax. “One reason they give for leaving to other places die and set up their estates is because of the state’s estate tax — a lot of other states don’t have estate taxes — [and so] they only have to contend with the federal tax,” Erhardt said. “We should at least be in conjunction with the federal and show them that we still love ’em here.”

Supporters of changing estate tax laws say many wealthy people don’t want to pay taxes on property and money they pass on to their children, and it hits large families especially hard. Tougher requirements on pass-through entities — legal entities that people set up to avoid double taxation — are also encouraging people to move even more property out of Minnesota, they say. 

But Winkler doesn’t necessarily buy the argument that people are fleeing the state to avoid estate taxes: “If people were fleeing to avoid that tax, we wouldn’t be collecting hundreds of millions of dollars,” he said. (The March 2014 review on estate taxes from the Department of Revenue also found little evidence so far that people were leaving Minnesota based on estate taxes.)

State Rep. Yvonne Selcer

Another proposal from Rep. Yvonne Selcer, DFL-Minnetonka, would delay the implementation of the 2013 gift requirement on the estate tax for three years. Selcer said some of her constituents have come to her confused about the law change, and her bill would give the state time to educate people before it starts collecting extra taxes.

Senate Taxes Chairman Rod Skoe, DFL-Clearbrook, led the charge to add the farmland and business exemption to estate taxes in 2011. Since the federal threshold for the estate tax increases with inflation, Skoe said, there’s some interest in bringing up the farmland and business exemption to match it.  But he offered caution about the cost of some lawmakers’ bills. “[Estate taxes are] going to be part of our conversation,” he said. “We are concerned about the ongoing cost and we are concerned about our budgets remaining strong. I would hesitate to say we would be going quite as far as some of the bills in the House.” 

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Comments (14)

  1. Submitted by joe smith on 03/17/2015 - 11:59 am.

    It is NOT your money Rep Winkler. At some point that money has been taxed as earned income by both State/Fed. If you invest YOUR money it gets taxed again as capital gains. If a person is successful, great for them. Who gets say how much money they can leave to their family, church, charity or anybody/anything they want? Hell, our Governor wouldn’t be in office if they took the Dayton fortune away. I’m sure he’ll vote for it though, as his fortune is safely tucked away in South Dakota. It fits the narrative of the left: hate the evil 1%, somehow THEIR success has screwed you out of your success and you deserve access to THEIR money. The crazy thing 50% of folks believe that BS…. I never felt for 1 minute because I was born and raised in Minnesota that I had any right to the Dayton fortune, I always figured it was theirs.

    • Submitted by Frank Phelan on 03/17/2015 - 01:15 pm.

      Earned Income?

      The tax code differentiates between earned and unearned income. It actually favors unearned income over earned income. That’s a pretty nice deal if you want to redistribute wealth, which is what the tax code has been doing for a few decades now. Like most people, I don’t have capital gains, I make it by the sweat of my brow, thank you.

      Wealthy estates don’t come about by earned income, it’s capital gains and other investment income primarily. So even while these folks are favored in life, now you want us to favor them in death as well. Very interesting, given the shrinking middle class that’s come about concurrently with these changes in the tax code.

      No one makes it entirely on their own. They rely on public infrastructure & employees educated by public tax dollars. Bill Gates wouldn’t be as wealthy as he is if he were born in an African village without running water or a school.

      The wealthy and corporations are not job creators. The middle class and working class are the job creators.

      There was a day when conservatives thought it immoral to come by huge sums of wealth without having worked for it. How times have changed.

  2. Submitted by Ray Schoch on 03/17/2015 - 01:08 pm.

    It’d be nice to qualify

    …for the estate tax, but retired teachers aren’t likely to do so, and I certainly won’t.

    My own bottom line is that I think it unhealthy for the society at whatever level (i.e., family, neighborhood, city, county, state, nation), and also unhealthy for individuals, for our society to encourage the development of an aristocracy. Whether the wealth comes from investments, the good fortune of being the CEO of a company whose board foolishly considers you worthy of multimillions, or the even greater good fortune of being born into a family in which you will automatically acquire piles of money as you reach maturity, there’s no fiscal or ethical reason not to tax that income.

    The fact that there’s no evidence that throngs of wealthy people are leaving Minnesota for other states without an estate tax is not a trivial matter, nor are the actual numbers. The top federal rate on the estate OVER the exemption amount of $5.4 million is 40%. The top Minnesota rate on the estate over the state exemption amount of, let’s say, $1.5 million, is 9 to 16%. If I win the lottery and die with an estate with a fair market value of $12 million, just picking a figure out of the air, I’ll try to rough it out conservatively. The first $1.5 million is exempt in Minnesota, so I’m paying about 15% on the $10.5 million that remains: $1.575 million to Minnesota, which leaves $8.925 million. The exemption figure for the feds is $5.4 million, so $5.1 million is taxable. I don’t know the rate offhand, but be pessimistic and assume the maximum 40% rate, for a tax of a bit more than $2 million ($2,040,000), which leaves a figure somewhere north of $5 million after all the taxes are paid to both Minnesota and the federal government.

    So, my relatives will be fighting over $5 million that they did nothing to earn except put up with my personality during family get-togethers. No matter how many bad jokes I tell, $5+ million seems to me like more than adequate compensation for being forced to listen to them.

    In short, an estate tax or inheritance tax – especially if exemptions have been written into the law for farmers and others with extensive land holdings, and taking into account the dollar amounts exempted from those taxes for those who are not farmers – does not qualify as “unfair” by any reasonable standard.

  3. Submitted by Rachel Kahler on 03/17/2015 - 01:32 pm.

    Earned income

    It’s pretty twisted that we are ok taxing people who work to make their money but not those who simply had the luck of having a wealthy relative die. If income is to be taxed, why is it immoral to tax it when it changes hands from someone who presumably doesn’t need it any more to someone who simply managed to outlive them?

  4. Submitted by Pat Thompson on 03/17/2015 - 03:24 pm.

    Minnesota Nice

    It’s not “Minnesota Nice” to have people without housing or health care, allowing tuition at public universities to get to the point where it puts students in debt for decades, or not funding child protection to the point where kids die.

    Taxing someone’s money that they did NOTHING to earn seems a lot nicer than lots of things I can think of that happen all the time.

  5. Submitted by Joel Stegner on 03/17/2015 - 05:33 pm.

    Estate taxes – a way to reduce income disparities.

    We have a problem in our society. It is called income disparity. Part of the reason is that it is growing at the rate it is because rich people are able to pass along huge estates – not to their spouse – but to their children and grandchildren, who have generally done nothing to earn the money. If you want to get rid of the estate tax, then tax inheritances and gifts not received by the spouse as regular income. Why in the world should people who are working minimum wage jobs or multiple jobs and scrapping by be subsidizing trust fund babies? It isn’t as thought with the estate tax, much of the value of the estate is taxed. The rich relatives who inherit are still made rich by the inheritance. So if you don’t like taxing dead people, then treat what people get from estates as earned income which is subject to income tax.

    As for people leaving the state to avoid paying taxes, those kind of people really only want to stay here as deadbeats – paying as little as possible to support the state in which most cases brought them their wealth. If they are that self-centered and cheap, let them go. But if their relatives still live in Minnesota and we tax estates as income, the money will be taxed when it changes hands, just as it does everything time an item subject to sales taxes is sold and resold. Government should not be in the business of making the privileged even more privileged than they already are. All the words thrown up in this article are a intentional smoke screen to cover up the reality.

    This takes nothing away from a couple when they are both alive – but stops treating their children and grandchildren as some kind of golden children who deserve special favors. Take from the poor and middle class in order to prop up the wealth of the rich relatives. Absurd!

  6. Submitted by joe smith on 03/17/2015 - 06:36 pm.

    It is immoral because it is the person’s money to do whatever he chooses, give it to a charity, kids, dogs, cats who cares, it is his money. Many people have worked really hard to leave their children something, (land, money, house, car whatever). My father, who worked in the mines of the Range, died yrs ago and my mom was so determined to leave her children something they had saved together, she lived meagerly for 24 yrs to give us the USsteel stocks they bought together in the 40’s, 50’s, 60’s and 70’s. I was almost 60 when my mom passed away but she was so proud to give us something her and my dad worked together on. You are not leaving money, land, car or a house you are leaving your lives work to those you care about.

    • Submitted by Rachel Kahler on 03/18/2015 - 08:23 am.

      How many million?

      Were you subject to the estate tax? Was it not income for you?

    • Submitted by Logan Foreman on 03/18/2015 - 09:12 am.

      The wealth issue

      The top 3% of American households hold 54% of the total wealth of the country; the bottom 90% of American households hold 25% of the total wealth. Don’t worry about the 3%

    • Submitted by Paul Brandon on 03/18/2015 - 09:15 am.

      How many shares of USsteel

      did your mother own
      to exceed the 1.4 million dollar exemption for the MN estate tax?
      Sounds like the dividends would have supported more than a ‘meager’ standard of living.

  7. Submitted by Chad Quigley on 03/18/2015 - 11:29 am.

    It’s not the State’s money

    It amazes me how many people believe they have a right to anyone’s money, alive or dead. There is no problem with income disparity, it’s only a problem in a liberals eyes and they believe that taking from one and GIVING to another will solve all the problems. If that solution worked, we wouldn’t still be fighting the war on poverty after trillions of wasted dollars. Liberals are just jealous that someone has something they want and they will do anything they can do to get their grubby little hands on it. It’s not your or the State’s money, plain and simple.

    • Submitted by Scott Walters on 03/19/2015 - 01:34 pm.

      We absolutely have a right to anyone’s money

      We have the right to take as much as we want. We could take it all, if we, through out elected representatives, thought it wise to do so.

      We don’t think that, so we don’t take 100 percent.

      The estate tax is an awesome tax, one we should maximize. It has only beneficial effects – the dead don’t care…they’re dead. The beneficiaries have no right to the cash…the decedent could have chosen to leave it to charity, to others, to a spouse, or to a stranger. Anything you inherit is simply by the grace of the decedent

      As no living person as any right to the cash, let’s go ahead and use it for the public good (because after all, that’s what our government provides us, public goods). Better roads, bridges, parks, pollution control, public safety, etc.

      If anything we ought to increase the estate tax. It’s probably the only tax where everybody (alive) wins.

      • Submitted by Pavel Yankovic on 03/20/2015 - 11:44 am.

        Scott,

        You are obviously not a high income earner or heir to an estate. Otherwise I think you would feel differently.

  8. Submitted by Connie Sullivan on 03/22/2015 - 04:23 pm.

    People should look at the most recent tax incidence study, which shows that, despite slow and effective moves toward more progressivity in Minnesota taxes, the 90% of us who make less than $200,000 pay more in percentage of income in state taxes than the upper 10%. Our system is fairer than almost all other states in that regard, but the ultra-rich still don’t pay as much of their income in state and local (or federal!) taxes as the rest of us do.

    I’m retired, living on Social Security (it was in my taxable income when I paid the SS tax when I worked, so I’m taxed twice on that money because 85% of it is taxed at full rate now) and pensions (two 401Ks and an IRA) that I pay full tax rates on. No 15% rate, as hedge fund managers pay on all their salary/fees. No break at all. They are fully taxable. I know, for a fact, that if you have capital gains and qualified dividends as unearned income, you pay less on it (top rate currently 15%) than the average worker pays on his $40,000 gross earned income from “the sweat of the brow.”

    The tax system is skewed to favor the wealthy. And ever more so, as they lobby to get tax circumstances that benefit passive investors with unearned income. Most people don’t even do their own taxes, to find out how deliciously qualified dividends and capital gains are treated, compared to wages and pensions. As one economist said, “If people only knew, there’d be rebellion.”

    Read Picketty, on how wealth is passed on and creating an unhealthy perpetual upper class or aristocracy that did not work for their wealth. He recommends not only a strong estate tax (they’re dead!) or inheritance tax (heirs didn’t earn it), but also an annual tax on accumulated wealth: a wealth tax.

    So, if you have accumulated $2 billion in wealth, each state and certainly the federal government should have a yearly shot at taking some of that unearned income for the public good. Not what that money earns; on the sum of all you own! That would be new to the U.S., and very effective in reducing the economic inequality in our society.

    We should increase Minnesota’s estate tax or establish an inheritance tax on heirs, rather than cut anything.

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