Why More States Are Killing Death Taxes

Want proof taxes can actually go down? In the last three years, nine states have eliminated or lowered their estate taxes, mostly by raising exemptions.

And more reductions are coming. Minnesota lawmakers recently raised the state's estate-tax exemption to $2.1 million retroactive to January, and the exemption will rise to $2.4 million next year. Maryland will raise its $3 million exemption to $4 million next year. New Jersey's exemption, which used to rank last at $675,000 per person, rose to $2 million per person this year.

Next year New Jersey is scheduled to eliminate its estate tax altogether, joining about a half-dozen others that have ended their estate taxes over the last decade.

This tax-cutting trend has been fueled by competition between the states for affluent and wealthy taxpayers. Such residents owe income taxes every year, but some are willing to move out of state to avoid death duties that come only once. Since the federal estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for inflation, state death duties have stood out.

"States are under pressure to keep pace with both the federal estate-tax exemption and exemptions in neighboring states," says Bruno Graziano, a senior analyst with information services firm Wolters Kluwer.

Two holdouts remain: Massachusetts and Oregon. These two have estate-tax exemptions of $1 million or below, compared with nine that did in 2009.

The tax bite is set to grow in each because neither adjusts its break for inflation.

In Massachusetts, some lawmakers are worried about losing residents to other states because of its estate tax, which brought in $400 million last year. They hope to raise the exemption to half the federal level and perhaps exclude the value of a residence as well.

These measures stand a good chance of passage even as lawmakers are considering raising income taxes on millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz in Needham, Mass., who tracks the issue for the Massachusetts Bar Assocation. State officials "are worried about a silent leak of people down to Florida, or even New Hampshire," he adds.

The outlook is different in Oregon, according to Mark McMullen, the state's chief economist. No efforts to raise the exemption have gotten traction in the legislature, although estate-tax revenue of more than $200 million for the two-year cycle ending June 30 is 50% higher than forecast, helped by strong housing and financial markets.

"We don't see a lot of folks migrating out to avoid the estate tax," says Mr. McMullen.

While most recent changes have been to state estate taxes, some states with inheritance taxes are feeling pressure as well. Six states have these levies, which are payable by the person who inherits assets rather than the estate of the person who died. States can have either one of the taxes, or both.

Inheritance tax rates and exemptions often vary according to the heir's relation to the decedent. In Nebraska, for example, there is no tax on assets left to a spouse, a top rate of 1% on assets left to lineal relatives or siblings, and a top rate of 18% on assets left to non-relatives.

Last year lawmakers changed Pennsylvania's inheritance tax, which brought in $962 million for the fiscal year ended June 30, 2016, so that family farms and businesses are exempt. The provisions were retroactive to 2012 for farm owners and 2013 for businesses owners.

In Kentucky, Gov. Matt Bevin has called for repeal of the state's inheritance tax, which has rates up to 16%, while remaining open to other revenue increases.

Two states, New Jersey and Maryland, have both estate and inheritance taxes. Although both have scaled back their estate tax, neither has cut the inheritance tax, according to Mr. Graziano.

In New Jersey, the inheritance tax is typically far less important than the estate tax because it exempts lineal descendants, says Samuel Weiner, an attorney with Cole Schotz in Hackensack, N.J. Although the rate on amounts left to unrelated heirs is as high as 16%, "People are just happy they're getting bequests," he adds. Maryland has generous exemptions to its inheritance tax as well.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

June 16, 2017 05:44 ET (09:44 GMT)