Did 29 states dump the estate tax to be more competitive?

The estate tax is the tax the government levies on your right to transfer assets upon death. Fans of the tax have called it the "Paris Hilton tax," after the hotel heiress who would benefit from a permanent repeal. Critics, who prefer to call it the "death tax," collected enough signatures to put a ballot measure on the Nov. 6, 2012, ballot to phase out the tax by 2016.

The "Yes on 84" campaign website has a page dedicated to "7 Reasons to Eliminate" the tax. Reason No. 6 is that the estate tax "weakens us — Oregon is one of only three states west of the Mississippi with a death tax." Estate tax haters say the tax discourages investment in Oregon because there are 29 other states where they can go to accumulate wealth and die, free from worry that the state will hit their heirs with a bill.

Here’s how the argument ends: "In 2001, all 50 states had some form of a death tax. The reason 29 states no longer have such a tax is that the tax damaged their economic competitiveness."

We knew from a previous PolitiFact Oregon check that Oregon is in the minority with its estate or inheritance tax, but we were a little fuzzy on how that all happened. Did 29 states dump their tax because of fear that another state would woo away rich residents? Like Paris Hilton’s dad?

We have to back up for a minute and explain how this works, because most of us will not die with enough money to have to pay this tax. In Oregon, the first $1 million of a person’s estate is exempt and the amounts above that are taxed at graduated rates. The federal government is more generous. The IRS exempts the first $5 million and has a maximum tax rate of 35 percent. That could change. Read on.

The feds didn’t always have a $5 million threshold. It used to be $675,000 but in 2001, President Bush signed the first of what’s come to be known as the Bush-era tax cuts. The Economic Growth and Tax Relief Reconciliation Act of 2001 -- better known to wonks as EGTRRA -- gradually increased the allowed exemption and lowered the maximum tax rate until 2010, when the estate tax would be repealed. In 2010, Congress set the current exemption and tax rate through 2012, at which point members need to review the issue again.

How did the 2001 law affect states? Or, more importantly, what was the competition like for those very wealthy, dying individuals?

The short version is that all 50 states were connected to the federal estate tax in some way, so they were pretty much on even footing. Most states used the "pickup" or "sponge" tax to get a share of the tax paid without imposing a separate tax on the deceased resident. This is why it’s accurate to say that all 50 states had an estate tax in 2001. The 2001 law gradually eliminated the credit that states could claim until it zeroed out in 2005.

Elizabeth McNichol of the Center on Budget and Policy Priorities, a left-leaning think tank, says that following the 2001 law, a dozen states decoupled from the federal estate tax law, allowing those states to continue collecting those taxes. Three states, including Oregon and Washington, approved estate taxes not tied to the federal tax. Seven states had to do nothing to maintain their estate or inheritance tax. The other states let their "death tax" provisions die.

"So with the Bush tax cuts in 2001, states were put to a choice of whether they would implement their own estate tax or whether they would let it phase out," said J.L. Wilson, a lobbyist with Associated Oregon Industries whose group supports the state ballot measure. "Most of the states in the west allowed their estate taxes to phase out."

We contacted Kevin Mannix, the Salem attorney and former legislator who is president of Common Sense for Oregon, the main organization leading the campaign in support of the measure.

First, he pointed out that the Measure 84 website has several tabs, including the "reasons to eliminate" page, which he considers to be arguments. The "death tax facts" page, Mannix says, is where the campaign puts out "facts," as opposed to "arguments." (A very interesting argument, we say.)

On we go to the facts page, where point No. 2 reads: "In 2001, all 50 states had estate/inheritance taxes. Since then 31 states have repealed them." That’s not true, since not all of the states actually repealed estate tax legislation, but Mannix says the campaign was "trying to shorthand the statement."  

So let’s return to the "reasons" page, which Mannix has by now changed, in light of PolitiFact Oregon’s query: "In 2001, all 50 states had some form of a death tax. Since then, 31 states have done away with such a tax." Mannix acknowledged that the campaign lacked the evidence to make the assertion that concerns over economic competitiveness had prompted the mass departure after 2001.

"Our main point is that in terms of competitiveness," he says, "every time another state eliminates the tax, those in the diminishing number that still have the tax are in a more difficult position."

Sure, that makes intuitive sense. If PolitiFact Oregon had $5 million and we could choose where we die, we might opt for the state without an estate tax so we could leave more money to the baby PolitiFact-lets. But we suspect there are many reasons that factor into where a person dies, even many financial reasons.

As of now, 28 states do not have an estate tax. That will grow to 29 in January when Ohio’s repeal goes into effectand to 30 in July when Delaware’s estate tax is set to expire. Earlier this year, Tennessee lawmakers agreed to phase out the state’s inheritance tax by 2016. The rest of the states have an estate tax, inheritance tax, or both in the case of New Jersey and Maryland.

On the West Coast, Hawaii let its tax lapse but approved a new one. Washington lawmakers approved an estate tax right away in 2005, which voters declined to repeal in 2006. Oregon lawmakers voted in 2003 to reconnect to the 1997 federal tax code, and not the 2001 one.

"We did make a conscious decision to connect," says Mazen Malik, senior economist with the nonpartisan Legislative Revenue Office.

(By the way, he also said his office found that repealing the death tax could result in a tiny bump of wealthier people moving to Oregon or deciding to stay in Oregon, but that any added tax benefit was negligible compared with an estimated $100 million a year Oregon collects in estate taxes.)

A key argument of the Yes on 84 campaign is to claim that Oregon is at an economic disadvantage because of our estate tax. Saying that more than half of states got rid of their estate tax laws because they feared being at an economic disadvantage drives home the point that Oregon could be dumb for not doing the same.

But that wasn’t the stated reason for most of those states. They didn’t take a vote to repeal. The feds made the change. The states just let the provisions lapse.

Mannix admitted he lacked the documentation to say that states no longer have an estate tax because of competitive fears. We’ll reiterate here what we’ve said elsewhere: Campaigns have a special responsibility to make sure they put out accurate statements. One would think that Mannix, a former legislator with decades of experience in Oregon public policy, would understand that.

Mannix corrected the statement in the "arguments" section online, although he still has an inaccurate statement on the "facts" page. We’re not going to elaborate on what we think about differentiating between arguments and facts, except to say that no matter what the label is, statements of fact should be accurate. This one isn’t.

We rule the statement False.

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