NY's Gravest Tax

New York - NY'S GRAVEST TAX

By ROBERT B. WARD
New York Post

NEW York is a fabulous place to live. More than ever, though, it can be a very expensive place to die. That's because the state's death tax, which Gov. Pataki and the Legislature effectively eliminated back in 2000, has like a vampire returned from the grave.

If you're a successful business owner, a top athlete or entertainer, a sharp investor or even a Mega Millions lottery winner, Albany will now take up to 16 percent of your estate after you die. Does that sound like an incentive to love New York or to leave?

The rebirth of the estate tax isn't Albany's fault. Six years ago, Pataki and the Legislature cut New York's tax to an effective rate of zero by setting the state tax at the amount that could be subtracted entirely from federal estate taxes. New York's tax remained as high as 16 percent, but the federal credit meant our tax was no worse than those in Florida or any other competitor state.

But, as part of national estate-tax reform, Washington no longer allows a full credit for state-level taxes. Florida and some 25 other states had written their laws so that the federal change automatically eliminated the state-level tax. Not New York.
But now Pataki is proposing to drive a stake through Albany's estate tax, repealing it entirely. That's good news and not only for rich business owners, entertainers and investors.
The rest of us want those wealthy individuals to stay here. Liberals may have scorned Ronald Reagan's "trickle-down economics." But the reality is that New York state's 243,000 millionaires and other wealthy individuals improve economic conditions, and thus quality of life, for the rest of us.

Many successful New Yorkers hold their assets in the form of a family-owned business, providing good jobs and benefits to their employees and broader contributions to the community.
In New York City, charitable donations from wealthy individuals provide vital support for private and public schools, hospitals, arts and cultural institutions. Tax revenues from the well-off make possible generous government spending on health care, education, transit, public safety and other needs. In 2002, the top 1 percent of resident taxpayers statewide paid 27 percent of personal-income tax revenues, some $5 billion.

Our costly estate tax puts those benefits at risk. Take, for instance, the hypothetical owner of a mid-sized company that employs 250 workers. Its value would vary depending on the nature of the business, but could easily surpass $50 million. When the owner dies, surviving family members who want to carry on the business would have to pay Albany an estate tax of more than $6 million compared to zero if the company had moved to Florida.

No business owner can ignore such a cost. Family concerns often address the problem by purchasing extra life insurance but that simply shifts the cost, draining large amounts of working capital every year. A 2004 study by economists Jon Bakija (Williams College) and Joel Slemrod (University of Michigan) found that a 1 percent differential in estate-tax rates was associated with a 4 percent drop in the number of wealthy residents in a given state. The difference between New York's estate tax, and those in competitors such as Florida and South Carolina, is many times the factor used in their study.

No wonder Florida now equals New York in the proportion of residents whose assets are worth $1 million or more 1.8 percent in both states, in IRS data. Many of those wealthy residents of Palm Beach and Bal Harbour might once have made Fifth Avenue their home, but now find the low-tax Sunshine State a better place to live.

Thousands more of the most successful New Yorkers can be expected to move away in coming years if Albany's estate tax remains in place. I recently heard from one former CEO of an upstate, family-owned business. He and his wife are now Floridians, joining his brother and aging father largely because of the estate tax.

"New York has lost the income tax on us (imagine the total of 35 years my dad escaped)," he wrote. "Sales tax, real estate and other taxes are the same or lower than New York. When will Albany ever learn that it is reduced spending, not increased taxes, that attract people and business?"
When, indeed?

Robert B. Ward is director of research at The Public Policy Institute/ The Business Council of New York State, Inc.