Don’t be an outlier, reform the estate tax

Failure to do so could put Mass. in a very bad situation

SOMETIMES TAX policy is hard and sometimes it is not. Voting to modernize the Massachusetts estate tax as part of the Legislature’s economic development bill is an easy decision – it costs little and protects the middle class, while preventing a flight of wealthy taxpayers from the Commonwealth.

Regarding the estate tax, Massachusetts is not just an outlier, but we are an outlier among outliers. There are only 12 states (plus the District of Columbia) that have an estate tax at all. Of those, Massachusetts currently shares the lowest exemption level at $1 million with Oregon, but ours is particularly bad policy as it taxes the entire estate rather than assets over the first $1 million – also called the “cliff” effect.

It is a basic principle of tax law that it is bad for a state to be an outlier – it raises the cost and confusion of compliance for taxpayers and creates opportunities to use their domicile as a tax planning tool – which makes unfortunate and unwelcome consequences for the state. Let’s examine the consequences of the current regime for middle class taxpayers, wealthy taxpayers and the Commonwealth as a whole:

  • The current estate tax has a $1 million threshold plus a cliff – that means if you go over the $1 million by so much as $1, the entire estate becomes taxable. Given that the median home price in Massachusetts is over $600,000, if you add an IRA, you get a situation where almost every middle class taxpayer has to file and pay an estate tax – which they do not have to pay federally or in pretty much any other state – and can no longer pass on a cherished family home to the next generation without paying a severe penalty. This is very much a Massachusetts-only tax on the middle class.
  • High income taxpayers have significantly more options, and they will use them to our detriment. In a recent poll, the Massachusetts Society of CPAs  found that 56 percent and 29 percent of members sometimes or always advise wealthy clients to change their domicile from Massachusetts based on the low estate tax threshold. This is compounded by the looming millionaire’s tax.  If that passes, 73 percent%of members say they will be even more likely to recommend a change in domicile. When wealthy folks leave the Commonwealth, they take with them their income tax, sales tax, and all their spending power in and around the community –   it’s a loss for all of us.
  • Finally, there is the intangible. When I was commissioner of revenue in Massachusetts, the tagline “Taxachusetts” used to haunt me. I found it terribly unfair. Taxes in Massachusetts might be a little higher, but not crazy, and in return you get a thriving, competitive economy with the best minds in the country – not a bad deal.  But when we have an antiquated, outlying, unnecessary tax with a threshold that unfairly taxes the middle class, that old moniker and all the underlying baggage starts sounding relevant again.

With this in mind, and on behalf of the 11,000 CPAs and accounting professionals MassCPAs represents, I urge the Legislature to pass estate tax reform as part of the economic development bill. By raising the threshold to $2 million and eliminating the cliff effect, this revision effectively eliminates the unfair impact on the middle class, mitigates the impact on higher income taxpayers (that they are likely to feel in combination with the millionaire’s tax, if it passes) and allows our state to thrive under leaders who understand the importance of balancing fairness with competitiveness.

This is a significant decision with far-reaching consequences. I implore the Legislature to act with haste. The Commonwealth and its taxpayers are depending on you to do the right thing.

Amy A. Pitter is president and CEO of the Massachusetts Society of CPAs (MassCPAs). Contact her at apitter@masscpas.org.