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6 Reasons to Keep the Massachusetts Estate Tax

alexander-mils-lCPhGxs7pww-unsplashBy Harry S. Margolis

The Boston Globe yesterday published an editorial (in which I’m cited) calling for reform of the Massachusetts estate tax, arguing that because we have the nation’s lowest estate tax threshold of $1 million, shared only with the state of Oregon, we are out of step with the rest of the country and especially other states in New England. They also argue that with median housing prices reaching $811,000 in the Boston area, that even estates of middle-income residents are subject to the Massachusetts estate tax and that they should not be.

Reasons We Should Keep the Estate Tax

I disagree for the following reasons:

  1. Median house value doesn’t tell the whole story. The median house value cited in the editorial does not tell us the amount of equity in the property, which is reduced by mortgages and home equity loans. As a result, the median home equity in the Boston area is certainly less than $811,000, and lower still outside of the high-priced zone of greater Boston. As recently as 2019, the median house value for the state as a whole was $418,600 (before any mortgages). An article in the same issue of The Globe mentions a study that found that the median net worth of white families in Boston was just $247,500 and non-white families had substantially less. The reality despite increasing house and stock portfolios is that few estates are taxable.
  2. Fighting inequality. We live in a country and time of growing inequality and Massachusetts has been ranked as the sixth most unequal state and Boston as the seventh most unequal city in terms of income. In 2015 the top 1 percent of families in Massachusetts earned 31 times the average of the bottom 99 percent. As is explained in this Washington Post editorial, wealth inequality exceeds income inequality because people with more money can save more of their income and pass it on to their heirs, and once they’ve done their wealth continues to grow due to the rising stock market and housing prices. Those without wealth do not benefit from a rising market. The estate tax is a small step towards evening the playing field.
  3. It’s progressive. All public policy decisions involve tradeoffs. If we raise less money through the estate tax, which is progressive, we’ll have to cut services, raise debt, or increase other taxes such as the income or sales tax which are regressive. The Massachusetts estate tax rates range from 0.8% for the portion of the estate under $100,000 to 16% for the portion over $10 million.
  4. Paying for our good fortune. The recent increase in housing prices in Massachusetts is the result of some things we’re doing right — a strong economy and good schools — and some things we’re doing wrong — not enough housing or investment in public transportation. The good fortune of having a highly-valued house for the most part is not due to individual achievement, except for the one of choosing to live here rather than in other parts of the country where housing prices have stagnated. Those who have benefited from such increases should help pay for the services that make Massachusetts a great place to live and to help ameliorate the factors that limit housing availability.
  5. It’s possible to shelter twice as much. With some relatively simple estate planning, a married couple can protect $2 million from estate taxation, making even fewer estates subject to the tax.
  6. Trade off with capital gains exemption.There has always been a trade off in the tax system between estate taxes and capital gains taxes. When the owner of property dies, the capital gain in effect disappears through what is called a “step-up” in basis. (You can read more about how this works here.) This used to make sense since the property would be subject to estate taxation and it avoided double taxation. But when the Congress raised the threshold for the federal estate tax to $11.7 million it left the step-up rules in place, allowing vast amounts of wealth to escape all taxation. (This is of great benefit to families of real estate developers who get the added tax write off of depreciation.) Massachusetts should not follow this federal misadventure.

In short, in terms of the estate tax, Massachusetts has it more right than other states.

But the Tax Could Be Improved

That said, the tax could be made simpler and more fair. The Globe editorial discusses two proposed changes I can get behind: making the $1 million threshold a real threshold rather than a cliff and instituting portability. Here’s what these are all about:

The Massachusetts estate tax has an unusual feature in that if an estate is even just one dollar over than $1 million after deductions gets taxed back to the first $40,000, so there’s an inappropriately large tax difference between a $950,000 and a $1,050,000 estate. (This and the entire Massachusetts estate tax are explained here.) It would make more sense if only the amount over $1 million were taxed.

The federal estate tax permits surviving spouses, in effect, to inherit the estate tax credit of the deceased spouse through a mechanism known as “portability.” As is explained above, through estate planning married couples can protect up to $2 million for the Massachusetts estate tax. Portability in Massachusetts would permit couples who did not plan ahead to shelter the same $2 million, meaning less work for estate planners like us, but a fairer system.

Let’s make our state more equal by keeping the $1 million estate tax threshold in Massachusetts but fixing some its less fair attributes.

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