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

The rhetoric over Minnesota’s estate tax is only expected to heat up in coming weeks, as lawmakers debate dozens of proposals to change, cut or eliminate the tax. 

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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.” 

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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. 

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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.”