Federal Estate Tax Repeal Could Cost Maryland Resources, Harm Services

May 11, 2017 by Natalie Neill in Blog, Budget and Tax

President Trump’s proposed tax reform package includes a harmful provision to repeal the federal estate tax on large inheritances. The repeal would put a revenue stream Maryland relies on to provide essential services at risk, while benefiting only the extremely wealthy.

Not only would federal tax cuts to the ultra-wealthy likely come at a cost to federal programs important in the state, federal changes would jeopardize Maryland’s ability to maintain its own estate tax. Our estate tax rules and asset measurements are linked by law to the federal estate tax.

Maryland is already in the process of increasing the threshold for estates subject to the tax. Maryland will match the federal exemption amount by 2019, at which point only 2 in every 1,000 estates would be affected. In 2016, despite only applying to the top 3 percent of estates, the inheritance tax provided $207 million in revenue, more than enough to cover the annual costs of all state behavioral health programs, including inpatient and outpatient treatment for addiction, for example.

Currently, the federal tax raises about $23 billion annually nationwide and only affects estates worth more than $5.49 million, or $10.98 million for couples.

Maryland’s strong school system, growing economy, and sound infrastructure make it a desirable place to live. To maintain these critical investments, everyone who benefits must pay their fair share. With the recent changes to the estate tax, the balance of the state’s tax code has shifted further — those with less pay a higher share of their income than very wealthy Marylanders. In 2015, the middle 20 percent of Marylanders – those earning $44,000 to $67,000 per year – paid the highest share of their income in taxes, at 10.3 percent. Meanwhile, the top 1 percent of earners, with incomes in excess of $480,000, paid the lowest share of their income in taxes, at 6.7 percent.

The estate tax is one way the tax code can work to level out inequality. If heirs pay no tax on large estates, much of the wealth would never be taxed. This is because large estates often contain assets only subject to tax when gains are “realized,” which usually means sold. The top 0.2 percent of Americans (the only ones who will be subject to an estate tax) should pay their fair share. Repealing the estate tax at the federal level would set a dangerous precedent and make it difficult for states like Maryland to further broad prosperity for all.