Gov. Andrew Cuomo's proposal to cut the estate tax rate and raise the level at which estates are taxed comes at a time when income growth of the wealthiest New Yorkers has skyrocketed, compared to the average New York family. In fact, precisely because of growing income concentration, the estate tax is projected to be the state's fastest growing revenue source. Cutting estate taxes will only allow the wealthiest families to concentrate assets at ever greater rates, and will further starve public schools and services of needed funding.
It is also essential to distinguish between the part of the governor's proposal that would increase the threshold at which the estate tax applies and the part that would reduce the tax rate on those very large estates that the Governor's Executive Budget actually classifies as "Extra Large" and "Super Large."
In the United States, inherited wealth has long been seen as a problem which slows economic growth. It means there can be no level playing field, no equal opportunity and a skewed relationship between hard work and reward. In light of this, estate taxes have promoted the common good for more than a century.
In today's world, where top paid executives often receive part of their compensation in the form of non-taxable stock options, one important way to get them to pay their fair share of taxes is through the estate tax.
An executive paid a salary of $500,000 will pay $44,100 in state income taxes, but if instead a stock option is taken, no taxes are paid until realized. If this happened every year for 20 years, at a normal market rate of return, the stock option recipient would accrue an untaxed $2.8 million windfall.
Under current estate tax rules, the estate would pay $285,000 on that windfall (the first $1 million would go untaxed). However, the Executive Budget proposal to increase the exemption to $5.25 million will allow the estate to escape taxation altogether on the compensation received through stock options.
Since no one will defend rich estates being able to evade taxes completely, proponents make the claim that average taxpayers will be caught up in paying estate taxes. The reality is quite different. Only 4,337 families or individuals paid any New York estate tax in 2012 — just .05 percent of the 8.7 million who filed tax returns. According to the Federal Reserve's Survey of Consumer Finances, the net worth of the median household is $64,900, about one-fifteenth of the current $1 million estate tax threshold.
Estate tax opponents often claim that the tax hurts family farms and small businesses, even though it is hard to find real life examples where someone has sold a farm or a business because of estate taxes. In any event, New York has an estate tax deduction for family-owned businesses while the federal estate tax has done away with that sensible and targeted form of estate tax relief. Rather than adopting the governor's proposal for reduction in the rates on "extra large" estates, it would be much smarter to consider increasing the existing family-owned business deduction or allowing a longer term payment plan in the case of heirs who want to keep operating farms and other small businesses.
While the Executive Budget states that New York's current estate tax policy "encourages elderly New Yorkers to leave," in a report prepared for the Solomon-McCall Tax Reform and Fairness Commission, the state's own tax policy experts concluded there is no evidence of people leaving the state because of the estate tax. In fact, New York's share of high-earning taxpayers is growing relative to the rest of the United States and their total income is growing two and a half times faster than the rest of the country.
Not only is the estate tax proposal unfair, but it cripples the state's ability to provide essential services. The Executive Budget proposes to cut taxes by 50 percent for the wealthiest estates over the next five years at a cost of nearly $800 million. \This, at a time when the state still has not honored commitments to fully fund public school foundation aid under legislation adopted in 2007. In the last five years, the state has kept revenue-sharing to localities flat while local fiscal pressures have risen and poor communities are struggling.
It is one thing to raise the threshold or exempt family farms and small businesses; it is another to lower the rate. Together, mainly downstate estates greater than $10 million will receive 50 percent tax reductions averaging $1.6 million or more under this proposal, while programs like universal pre-K will go wanting for lack of funds.
We should be talking about proposals that promote economic growth, like increasing the earned income tax credit or increasing support for public higher education. There are solutions to truly protect middle income families, but this proposal is only a giveaway to the wealthiest families.+++++++---------------------------------------------------------------