NTF Issue Paper: legwatch88.doc. 1-16.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
DON’T BE CAUGHT DEAD IN NEBRASKA: LOWER THE STATE INHERITANCE TAX.
BACKGROUND. Nebraska is one of only 7 states that continues to collect a state inheritance tax. LB 936, sponsored by State Sen. Laura Ebke, would exempt $100,000 instead of $10,000 from state inheritance tax and lower the tax rate from 13% to 1%. Meanwhile, conservative congressmen are pushing legislation to eliminate the federal inheritance tax.
HARSH NEBRASKA INHERITANCE TAX. Nebraska repealed its state estate tax in 2007 but remains only one among 7 states that assesses an inheritance tax on property owned by residents and non-residents. Estate beneficiaries receive an exemption from the tax depending on degree of relationship to the deceased. Surviving spouses and charities are wholly exempt. Immediate relatives such as children, parents, grandparents, and siblings have an exemption of $40,000. Of the other 6 states that collect the tax, 4 exempt kids and grandkids from the tax. Remote relatives like uncles, aunts, nieces, and nephews receive an exemption of $15,000. Immediate relatives must pay a 1% tax, remote relatives 13%, and others up to 18% after a $10,000 exemption. Also, property transfers made by a person soon to die, transfers of gift monies made 3 years prior to death (as if one knows when one will die), and transfers due to take effect after death all fall subject to tax. Life insurance payable to the deceased counts as part of an estate. Employee benefit plans are subject to tax if subject to federal estate taxation. Inheritance taxes must become paid within 12 months after the decedent date of death, a tax return completed and returned to the county attorney office for approval, and a tax proceeding begun in a county court.
DUBIOUS REPUTATION. Forbes Magazine dubbed NE as the place not to die because of our high death taxes. Adults ages 55 and older flee the state more rapidly than any group except young college graduates, probably because of the threat to their earnings and heirs.
COUNTY REVENUE. Proceeds from inheritance taxes go to county general funds. Counties claim to use these monies to tamp down property taxes but sometimes spend the proceeds on extraneous items like millions given by the Douglas County Board to the UNMC Cancer Center. Because Nebraskans do not die on set schedules, the tax is an unreliable revenue source for counties, and receipts can vary widely from year to year. Counties instead should lobby the Legislature to remove unfunded mandates in order to substitute for the subsequent loss in revenue.
CONSERVATIVE POLITICAL ARGUMENTS. Liberals believe that private wealth is socially undesirable. Proponents of this tax claim that it will make society more just and equitable, because success in society will depend less on family and more on skill and talent. State inheritance taxes never have achieved the major liberal objective, to reduce income inequality. Social engineering is incompatible with a free, capitalist society. It has a negative effect on willingness to accumulate wealth through work, saving, and investing. This tax double taxes earned income, as at least a portion of an estate is earned income. It has a minor effect on local budgets. This tax infringes on personal rights to our property. It directly contradicts the intent of wills. Heirs should freely use the accumulated wealth that belongs to them through property rights. Parents should be able to provide to their offspring or other relatives with whom they have bonded. Those facing death feel emotional stress and insecurity about whether the company or estate they have created is going to their children or will close or sell because of inheritance taxes. Nieces and nephews may find it impossible to continue an inherited business. Removing a share of inheritance is not protecting our fundamental rights. Posthumous taxation is tantamount to grave robbery, only on a much larger scale.
ECONOMIC ARGUMENTS. Inheritance taxes reduce the wealth of individuals meant to transfer to others and present a disincentive to accumulate wealth and property. If individuals realize that their private property will face high taxation following their death and before going to heirs, they more likely will consume more of their estate, a negative effect on future investment and capital accumulation. Accumulated wealth can cushion citizens against the ravages of recession. Actually, lowering or abolishing inheritance taxes will bring sustainable economic growth, a main objective of state government. Doing such also means that those facing death will have the security of knowing their loved ones will have enough to live comfortably, a worry most parents have in common. Ability to generate wealth not only for him but also for his children gives more incentives for an individual to work harder. This is beneficial for the whole society, because more work creates more value overall. However, imposing an inheritance tax reduces the incentives for a behavior which is beneficial for society. People naturally will work hard for their families but not for the government. Inheritance taxes destroy small and family businesses, as heirs must sell a part or whole of a business. Punished for creating wealth. Owners sometimes decide to not expand. One study showed that if inheritance taxes entirely disappeared, hiring would increase by 8.6%, payrolls by 2.6%, and investments by 3% in family businesses.1 Morally, the tax taxes virtue, living frugally, and accumulated wealth. The tax is a triple tax on property, as both the deceased and inheritor pay this tax. Fees paid to accountants and tax attorneys to complete paperwork further diminishes the benefit. The tax penalizes those who leave substantial wealth to someone not on the state government list of approved heirs.
TAX AVOIDANCE. People use many ploys to reduce their tax exposure. They establish trusts taxed at a lower rate than inheritance taxes. They transfer gifts that avoid taxation up to a specific level. Some utilize offshore tax havens. Others cheat on their taxes to conserve estates. Reducing their exposure only weakens the inheritance tax imprint. While some carefully engage in estate planning to avoid this tax, a disproportionate burden falls on those with modest wealth, like farmers and small businessmen. As inflation, appreciation of property, and salary amounts increase, many more individuals find themselves snared by the inheritance tax.
TAKE ACTION NOW. LB 936 would reduce the amount of inheritance taxes that heirs must pay and boost our economy. Fleeing seniors take with them their experience, institutional knowledge, disposable incomes, and taxable incomes, harming our economic growth. We must convince state senators to make NE a more inviting abode for the elderly and those who will inherit their estates. Lobby your senator today to vote FOR LB 936. Email netaxpayers@gmail.com to receive senator contact information and to join our NTF Legislature Watch Project.
Research, analysis, and documentation for this issue paper done by Nebraska Taxpayers for Freedom. This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by other groups in the Nebraska Conservative Coalition Network. 1-16. C