Gov. Jennifer Granholm has proposed a 2008 state budget of $43.3 billion. If enacted, this will be the highest spending level in state history by about $1 billion. To get there, the governor has requested a number of tax hikes. While the largest would give birth to a brand new 2 percent excise tax on services, her plan to resurrect Michigan’s estate tax also is noteworthy. Popularly known and better defined as a “death tax,” it is levied on an estate when the owner dies. There are few, if any, good reasons to give it new life in Michigan.
Up until 2005, Michigan’s death tax was a creature dependent upon a federal death tax that provided taxpayers with a credit for any state death taxes they paid. This credit meant that a taxpayer’s total death taxes weren’t raised at all if states levied the amount of the federal tax credit. This made imposing a state-level death tax that was only as large as the credit politically cost-free, since the federal government was doing the dirty work of demanding the money first. Not surprisingly, every state once had a death tax at least that high.
This all changed when the federal government began phasing out its death tax in 2002, which included an elimination of the state credit in 2005. (The federal death tax is set to expire entirely in 2010, but due to some political complications will be fully reinstated for 2011.) Michigan and about half the other states allowed the death tax to expire in 2005 along with the state credit. In other states, death tax laws were decoupled from the federal law, thus allowing those death taxes to live beyond 2005. Estate owners now have an option to relocate to avoid paying the death tax, a threat that has inspired some states with lingering death taxes to eliminate them. The Democrat governor of Virginia specifically referenced fears of a competitive tax disadvantage as the reason for signing a repeal of that state’s death tax last summer.
Reinstating Michigan’s death tax would put our economy at a disadvantage with states like Virginia. The Michigan Office of the State Budget estimates that the Michigan death tax plan, if reinstated, would apply to about 350 estates and bring in $119 million for 2008. This is an average of $340,000 per estate and obviously a significant incentive for those estate owners to pick another place to park their money. They have plenty of options, including all those other states that are not looking at reinstating a death tax.
Could the state treasury collect all of that $119 million? There are reasons to expect not. The Tax Foundation in Washington, D.C., and others have calculated that collecting the federal version of the death tax may have cost more money than it brought in. This was because estate owners would carefully avoid the tax by giving away or otherwise disposing of a lot of their wealth before death, and also because the complexity and compliance costs of the death tax were estimated to exceed that of even the federal income tax. And this was in an environment where all 50 states imposed a death tax, leaving estate owners with no domestic tax havens as options — a critical restriction that no longer exists.
But less money in the treasury will be the least of the death tax damage. Michigan has already suffered a protracted economic decline while the rest of the nation prospers. What we can least afford from the death tax is the likely exodus of capital resulting from estate owners relocating to avoid it. Pushing more money out of Michigan means less money to build homes, purchase goods and services and invest in businesses and jobs. The death tax is sometimes defended on grounds that it prevents the rich from getting richer, but bringing it back to Michigan will produce precisely the opposite result: A poorly performing state will get poorer.
Kenneth M. Braun is a policy analyst specializing in fiscal and budgetary issues for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.