This week’s “Daily Journal” guest columnist is Joseph Coletti, John Locke Foundation Director of Health and Fiscal Policy Studies.
RALEIGH — A bumper sticker says, “Unlike taxes, death doesn’t get worse every year.” Thanks to taxes, however, death got more expensive this year.
Republicans in Congress and President Barack Obama resurrected the death tax in their December 2010 compromise to extend most of the Bush-era tax cuts. The death tax, officially called the estate tax, fell systematically until it was eliminated entirely in 2010. Without the December deal, the federal tax rate today would again be 55 percent. Instead, the tax is capped at 35 percent until 2013.
Like the undead in any horror movie, the death tax has a wicked twist that did not exist before. Where state death taxes were previously counted as a credit against the federal tax, they can now only be deducted from income. Instead of a free tax for the state and a set 35-percent tax rate for families with the credit, families now face an effective tax rate of 45.2 percent of the estate’s value, according to the American Family Business Foundation.
North Carolina could also exempt fewer families than federal law. The federal tax exempts estates with up to $5 million in assets ($10 million for a couple) from taxation, but Gov. Bev Perdue would exempt only estates up to $1 million, leaving more families exposed to the tax.
Personal finance radio and television host Dave Ramsey calls the death tax immoral. He compares it to having movers pull up to the house and take 45 percent of everything.
North Carolina has many advantages that attract people to the state and keep them here despite higher taxes than most other states in the South. Economics research shows that places with more amenities, such as North Carolina, often have higher pay for public employees compared to the services offered.
States without North Carolina’s other advantages, such as Rhode Island and Connecticut, have lost residents and tax revenues as a result of their estate taxes. The Ocean State Policy Research Institute, a Rhode Island think tank, and the state of Connecticut each found that estate taxes were a factor in decisions to move from the state.
It clearly was not the only factor as North Carolina was the second-most common destination, far behind Florida, but taxes in general were a significant factor together with work force quality and the costs of doing business. North Carolina has low energy and labor costs, but it has the 10th-worst business tax climate in the country, according to the Tax Foundation.
If taxes driving residents out of the state sounds familiar, it is because it has happened before. North Carolina lost businesses and tax revenue when it tried to impose an Amazon Tax on online retailers if any websites participating in their affiliate programs were located in the state.
The retailers dropped their North Carolina-based affiliates, and the state lost those small businesses and their income taxes without the hoped-for gain in sales taxes.
There is a bill that would save taxpayers $59 million by matching the federal exemption. That is almost all of the $62 million the death tax generates for the state and calls into question why the state should impose any tax on death in the first place.
Thirty-eight states, including Texas, Florida, Georgia, South Carolina, and Virginia, do not impose a death tax. When Florida eliminated its death tax in 2004, capital income in that state jumped as estates subject to the death tax generally have a large portion of assets that generate capital income.
Rather than seek ways to tax businesses, successful entrepreneurs, and workers, the General Assembly is wisely looking to reduce the size of government and the need for new or “zombie” taxes. Savings must come first, but are not enough. State government cannot just do less of the same thing. If the General Assembly follows the path laid out in the John Locke Foundation’s budget proposal, it will lay the foundation to transform what government does instead.