By Michael Dresser, The Baltimore Sun
2:57 PM EST, February 2, 2014
At a time when income inequality is one of the nation's most-discussed issues, the tax that appears to have the best chance of being cut in heavily Democratic Maryland this year is one that is only paid by millionaires.
Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch, both Democrats, have joined to support a reduction in the estate tax by gradually raising the amount of money that is exempt.
In doing so, the Democratic leadership of the General Assembly is co-opting an issue that long has been championed by Republicans. But in an election year, and with the revenue problems of the recession years easing, even some liberal Democrats think it's time to bring Maryland's tax on family inheritances into line with the federal government's.
Miller, who lives in Calvert County, said it's a matter of staying competitive with other states, most of which have no estate tax.
"It should be a priority of all Marylanders because we're having a net loss of revenue to our sister states with regard to people who are being advised by their accountants and estate planners that they can save money for their heirs if they maybe say they live outside the state of Maryland," he said.
The legislation Miller backs would raise the level at which the tax kicks in from $1 million to $5 million. That increase, which would be phased in over four years, would bring the state exemption close to the federal level of $5.34 million, but without the automatic inflation adjustments in federal law.
Many General Assembly Republicans want an outright repeal of what they call the "death tax," but that's unlikely to find support in the Democrat-dominated General Assembly. Senate Minority Leader David R. Brinkley, a Frederick County Republican who sponsored legislation last year that would have brought Maryland's exemption to the federal level in one step, said he would support Miller's approach this year.
Gov. Martin O'Malley has been noncommittal about the plan, which is not one of his priorities. But his tendency over his seven years in office has been to avoid vetoing bills Busch and Miller support.
The plan comes as Maryland lawmakers are expected to raise the minimum wage, an idea also championed by President Obama. Trimming back the estate tax would send a message that state lawmakers care about their higher-income constituents, too — without the high cost to revenue of some other proposed tax cuts.
The change is drawing support even from lawmakers to the left of the centrist Miller. Sen. Jennie Forehand, a liberal Democrat from Montgomery County, is sponsoring a Senate bill on the subject.
Forehand said she knows several people who have moved out of Maryland to avoid the tax, which has a top rate of 16 percent.
She said it's especially easy for people who own second homes in Delaware, which matches the federal exemption, or Florida, which has no estate tax, to avoid the Maryland tax by spending more time out of state.
"Many of them are still living up here and just using the other address as their prime address," she said. "Legislators are realizing that some of their most active citizens are no longer on the voting rolls."
Forehand said she believes raising the exemption would eventually produce a revenue gain but cautioned that she "can't swear on it." The belief is shared by many Republicans, who have long contended such a change would allow the state to collect more revenue by reducing the incentive for taxpayers to establish residence elsewhere.
Warren Deschenaux, the legislature's chief policy analyst, isn't convinced. The man whose job it is to throw cold water on many legislative tax-cutting ideas said bringing the exemption to the federal level would cost $80 million to $90 million a year in revenue when fully implemented. That's about one-half of 1 percent of the revenue in the state's $16 billion general fund.
Deschenaux said there is no empirical evidence to show that a significant amount of new revenue would offset the lower taxes.
"There's plenty of anecdotes, but we have the highest concentration of millionaires in the country," he said. "Clearly we are not scaring the wealthy away."
Thomas E. Hill, a financial adviser in Easton, wrote to Miller that he has seen many clients leaving the state to avoid the effects of the tax. The result, he said, has been a glut of expensive waterfront homes on the real estate market and a loss of business for attorneys, restaurants and stores in Talbot County.
"A lot of people have grandchildren here and children, and they don't want to leave Maryland," he said in an interview. "It puts people in a difficult position."
Mark Feinroth, director of regulatory affairs for the Maryland Association of Realtors, said the tax makes it hard for Maryland families to build wealth from generation to generation.
"We think it affects decisions about where people choose to live," said Feinroth, adding that the tax could motivate some Marylanders to move across the Potomac to Virginia, which has no estate tax.
Busch, who represents Anne Arundel County, is skeptical.
"I don't see any mass exodus. I've never given any credibility to that theory," he said.
The speaker said the reason he supports the change is that Maryland's estate tax is "out of sync with the rest of the country."
"You'd like to think your entire tax code is competitive," Busch said.
Maryland is one of 19 states and the District of Columbia that have an estate tax. Eight of them have higher exemption levels. Only one state, Washington, has a higher top rate.
Maryland is one of only two states that have both an estate tax and an inheritance tax, which applies to bequests outside the family.
Deschenaux said there is no double taxation, because those who pay the inheritance tax get a credit against the estate tax. But it is a distinction that colored Maryland — along with New Jersey — red on a map with a recent Wall Street Journal article called "States You Shouldn't Be Caught Dead In."
Daniel E. Hoff, president-elect of the Carroll County Association of Realtors, said Maryland's estate tax doesn't affect the typical real estate transaction, but it does hurt the overall business climate.
"Do I think it's having a negative drag on our local economy and business environment? Yes, I do," he said.
If Hoff were starting a small business in his area, he said, he'd likely choose to locate it in Pennsylvania, another state with no estate tax.
Benjamin Orr, executive director of the Maryland Center on Economic Policy, said that if he could allocate $90 million a year from the state's revenues for tax relief, reducing the estate tax wouldn't be his choice.
Orr said affluent Marylanders already have estate-planning tools they can use to reduce their tax liability. He would rather see an increase in the state's earned income tax credit, which benefits the working poor.
"The burden of taxation already falls disproportionately on those less able to pay," he said. "If you're able to leave an estate worth $1 million to your heirs, you're not in too terrible a position."
Copyright © 2014, The Baltimore Sun