Nothing may be as certain as death and taxes, but one thing comes close:
predictions that the current state budget mess would cause lawmakers to attempt
to resuscitate Michigan’s death tax. Gov. Granholm has made that prediction
come true with her fiscal year 2005 budget recommendation. She proposes a 5
percent tax on estates worth $1 million or more.
Contrary to reports of its demise contained in 1993 Engler-era press releases,
the state death tax lives on. It does so in a stealthy form that Michigan heirs
never feel. This is because the tax is linked to the federal death tax.
Here’s how it works: Prior to the 2001 Bush tax cut, which phases out the
federal death tax by 2010 (the phase-out actually has a sunset provision that
will bring back the tax if federal lawmakers do nothing, but that’s another
story) the IRS tax code allowed Michigan to "pick up" (or "sponge") almost a
third of a decedent’s federal estate tax liability. The maximum federal estate
tax rate was levied at 55 percent of the taxable value of the estate, but a
credit for up to 16 percent of the taxable value paid in state death taxes was
other words, Michigan’s estate tax law never really disappeared. Lawmakers
simply established that the state death tax rate would equal the maximum amount
of the federal credit. So if your estate owed $110,000 the feds would allow the
state to "sponge" up to $32,000 of this, leaving $78,000 for the IRS.
federal Economic Growth and Tax Relief Reconciliation Act of 2001 upset this
cozy relationship. It phases out the federal death tax over 10 years, but the
state tax credit disappears much more quickly. For those who died in 2002, the
state was allowed to pick up just 12 percent or $24,000 in the example above.
For those who died in 2003 the amount was only 8 percent, this year it’s 4
percent, and after that the credit will be replaced by a tax deduction.
since Michigan’s estate tax has no independent existence without the federal
credit, there will be no payments to the state, and therefore no federal
deduction. The un-dead Michigan death tax will finally have a wooden stake
driven through its heart.
so fast, says Gov. Granholm, who has proposed breaking the link between the
state and federal death taxes, in effect creating a new 5 percent Michigan death
tax. Her tax would deprive the heirs of Michigan decedents of some $130 million
a year. As parents of the baby-boom generation begin to pass away in larger
numbers, this amount will rise substantially.
Restoring Michigan’s death tax would be unfortunate. Aside from making the 2001
federal tax cut a "give with one hand, take away with the other" affair, the
bill would saddle the state economy in perpetuity with all the pernicious
effects of a death tax, which is really a tax on the American dream. Death
taxes steal the chance of many small business and farm owners to leave the
enterprises they built to their descendants, because the heirs are often forced
to liquidate their assets in order to pay the taxes.
addition, the death tax is harmful because it encourages spending, not saving.
It sends a powerful signal that the accumulation of even modest wealth will lead
to heavy taxes. When an owner realizes that the estate will take a large tax
hit, he or she may spend down the estate or remove the business from the
family. Economist William Beach of
The Heritage Foundation says that because of the death tax, "it makes sense
to buy vacations in Aspen, Colo., or a painting by Rubens instead of investing
in new productive equipment or expanding a business."
Beach and his fellow economists used two of the nation’s best statistical models
to forecast what will happen as the federal death tax is repealed. They found
numerous benefits that will likely flow from the increased incentives to save
U.S. economy could gain as much as $11 billion per year in economic output.
Approximately 145,000 new jobs will be created.
Personal incomes will rise an average of $8 billion per year above current
Sadly, Michigan’s economy will not fully enjoy these benefits if the governor’s
death tax proposal becomes law.
Note: Jack McHugh is legislative analyst for the Mackinac Center for Public
Policy, a research and educational institute headquartered in Midland, Mich.