On Estate Tax, Perception Poised to Triumph Over Reality
/By Michele Jacklin
Repealing Connecticut’s estate tax is a solution in search of a problem.
Nonetheless, momentum appears to be building to eliminate a levy paid by the super-wealthy, a tiny clique of mostly Fairfield County residents who have already benefitted enormously from last year’s federal tax law. But its repeal has the support of Republicans, newly elected Gold Coast Democrats and the state’s business community.
The estate tax has become a front-burner issue because as the Baby Boom generation begins to reach the end of their lives, a record amount of wealth is predicted to be passed on. A report by the multinational accounting firm Deloitte estimates that in the United States, nearly $60 trillion will be channeled from those born between the mid-1940s and the 1960s to their children.
Given the expected transfer of wealth, elected officials in southwestern Connecticut say they got an earful when they knocked on doors during last year’s campaign season, even though only 656 filers actually paid the estate tax in 2018, a number destined to shrink as the exemption level rises over the next few years.
These are the same folks, by the way, who received a federal income tax rate cut in 2018 from 39.6 percent to 37 percent, compliments of President Donald Trump and the Republican-controlled Congress. That incremental drop may seem like chump change but for a couple with $2 million in taxable income, that’s an additional $36,400 in their pockets.
They save in other ways as well. By way of comparison, the top income tax rate in Connecticut is 6.99 percent, while New York’s is 8.82 percent and New Jersey’s is 8.97 percent.
But the estate levy – euphemistically dubbed the “death tax” by critics – is a classic case of perception triumphing over reality. The perception being pushed by abolitionists is that the ultra-wealthy are packing their belongings and fleeing to more tax-friendly environs. And that by eliminating the tax, which applied to residents with an estate valued at $2.6 million or more in 2018, the rich will unpack their suitcases and stay.
The evidence that Connecticut’s super-wealthy are leaving because of the estate tax is apocryphal, at best.
Still, perception is reality to some. State Sen. Alex Bergstein, a newly elected Democrat from Greenwich, was quoted recently as saying the levy is “a pittance,” although it sends “a signal that we don’t want high-income earners here.”
“A pittance” is assuredly in the eye of the beholder, especially if the beholder is the State of Connecticut, whose expenditures outrun revenues year after year after year. To put it in perspective, in fiscal 2018, the levy contributed $224 million to the state’s coffers. As higher exemptions kick in and the number of filers dwindles, the state Office of Policy and Management projects Connecticut will forfeit about $193 million over the next four years.
That revenue will have to be offset by either spending cuts or tax hikes. Gov. Ned Lamont promised during last year’s campaign that he would not raise taxes. However, there is widespread speculation that Lamont will seek to broaden the sales tax base, that is, the items and services that are subject to the 6.35 percent levy. To low- and middle-income residents, whether Lamont raises the sales tax rate or broadens the base is a distinction without a difference. Either way, it means those who can least afford it and who pay a larger percentage of their income in state and local taxes than the wealthy, will once again disproportionately bear the brunt.
Meanwhile, the super-rich are clamoring for the estate tax to be repealed, even though fewer and fewer of them will fall under its spell. That’s due to a state policy change enacted in 2017 that linked the Connecticut’s estate and gift tax exemption level to the federal threshold. That would have increased Connecticut’s exemption from $2.6 million in 2018 to $5.1 million in 2020; $7.1 million in 2021; and $9.1 million in 2022, according to Reporter Keith Phaneuf of the Connecticut Mirror. But the new federal tax law had the effect of more than doubling the estate tax threshold to roughly $11.4 million in 2023.
Overall, that all adds up to a significant windfall for the state’s ultra-wealthy residents. This year, for example, if their estates are worth less than $3.6 million, the assessment will be zero. For those with estates valued between $3.6 million and $4.1 million, the assessment will be 7.8 percent rising to $663,000 plus 12 percent of the excess on estates valued at about $10 million.
But, as a result of the ever-increasing thresholds, it’s estimated by OPM that the state will collect only $126 million in 2022.
Of course, not everyone is in agreement that the estate tax should be repealed and that the wealthy deserve yet another tax break. Recently conducted surveys show strong support for increasing taxes on top earners, notably a new POLITICO/Morning Consult poll that found 76 percent of registered voters believe the wealthiest Americans should pay more in taxes. A Fox News survey showed that 70 percent of Americans – including 54 percent of Republicans -- favor raising taxes on those earning more than $10 million.
So why all the fuss over the estate tax? And why are state officials in a headlong rush to abolish it? It’s hard to figure.
In fact, the soundest policy might be to decouple the state and federal thresholds and allow the richest of the rich to pay their fair share. But that isn’t going to happen. The estate tax appears to be sinking slowly on the horizon, weighed down by the incorrect perception that Connecticut’s wealthiest residents are shouldering an unfair tax burden.
