RALEIGH – Death should not be a taxable event in North Carolina.
As I have previously written, a costly element in the proposed state tax increases over the next two years involves the reimposition of an estate tax. According to the American Family Business Institute, North Carolina is one of 20 states that still imposes a tax on estates. We used to levy an inheritance tax, which technically hit up recipients of an estate, but that was junked in 1998 when the General Assembly enacted an estate tax instead.
At the time, levying an estate tax didn’t really change the overall tax liability. At the risk of oversimplification, the federal government was offering a tax credit for the amount paid in state estate taxes. Essentially, by ditching the inheritance tax in favor of the estate tax, North Carolina pocketed as state revenue dollars that would otherwise have flowed to the federal government (because taxpayers received the federal tax credit).
In 2001, the Congress began to phase out the federal tax. North Carolina should have phased its own tax out at the same time, given how closely tethered it was to the federal levy, but instead legislative leaders and the governor chose to continue collecting it. They apparently believe that state government can’t afford to give up this revenue source, and most probably also believe in the quasi-socialist notion that government should seize the property of wealthy people on their death and redistribute it.
Most Americans and North Carolinians don’t agree. By a sizable majority in most polls, they don’t believe that taxing death is fair or economically wise, and in that view they show a better understanding of the issue than do most tax “experts.” A sound tax system would levy a single rate a single time on the same stream of income. My preference is to tax this income during the year in which it is consumed, which eliminates several biases and double-taxation problems.
To tax death makes sense only if you think there is an economic transaction going on. That is, if you do some professional work for me, and I choose to compensate you in the form of a bequest rather than immediate cash, perhaps there is a case to be made, from an equity standpoint, in levying a tax on the payment you receive. Also, if heirs receive assets from tax-deferred savings accounts, such as IRAs or 401(k)s, then I think appropriate tax should be levied.
But most inheritances don’t conform to either of these conditions. It is bizarre to think of family ties or friendships as taxable business transactions, for example. The principle is the same whether the amount is $100,000 or $100 million – if the person who earned the money was taxed on the money, then it should not be taxed again if given away at death.
North Carolina is going the wrong direction on estate taxes, as this Business Journal report demonstrates. “There are better places in this country to die than in North Carolina,” one attorney told the newspaper. Of course, that means that there are better places to live, work, invest, and build businesses than North Carolina — meaning lost economic opportunities for North Carolinians.
Levying a state death tax is unfair and anti-competitive. Let’s stop it.
Hood is president of the John Locke Foundation.