Contact Us: 781-705-6400

Will They or Won’t They? — Raise the Estate Tax Threshold

Massachusetts-estate-tax-increase-Margolis-bloom-d'agostino

With the $1 million Massachusetts estate tax threshold tied with Oregon at the lowest in the nation, there’s a lot of pressure to increase it. Proponents for raising the level argue that we’re out of step with other states, that it encourages higher earners to move out of state, and that it’s only fair because middle-income residents of Massachusetts often end up with taxable estates simply due to the appreciation of the value of their homes.

Opponents argue that the estate tax is an important mechanism for combating the growing inequality in Massachusetts, that there’s no evidence that the tax causes a significant number of higher earners to move out of state, and that the huge appreciation of home values in the state is something of a windfall for homeowners so it’s appropriate to tax it. Further, they argue, that Massachusetts has huge unmet needs and no one is offering a plan for raising the revenue that will be lost by raising the estate tax threshold.

In terms of people moving out of state to avoid the estate tax, the Massachusetts Budget & Policy Center has issued a report examining IRS data that shows that high-income households are not fleeing the state. My own limited perspective is that it is happening on the margins. Some people who are already spending part of the year in Florida or New Hampshire, for example, are planning to spend at least six months of the year in those states, as well as changing their voter and car registrations, in order to switch their residency out of Massachusetts.

Proposals

There are at least three different proposals for raising the estate tax threshold.

Governor Maura Healey has proposed giving every estate a $182,000 credit, which is the amount of tax a $3 million estate would would pay. This would effectively raise the threshold to $3 million but also reduce the tax by the same $182,000.

The Massachusetts House of Representatives has passed its version as part of its recent tax-cut package giving every estate a $2 million exemption. While the House Ways and Means summary of the bill says it increases “the estate tax threshold from $1 million to $2 million,” it appears to me to effectively raise the threshold to $3 million. It also lowers the tax on larger estates because the estate tax is graduated. By permitting larger estates to exclude $2 million, not only does it mean that they won’t pay tax on this amount, but that they will not be pushed into higher tax brackets quite as quickly.

The House bill is now before the Senate Ways and Means Committee. In the meantime, Senator Julian Cyr has proposed in Senate Bill No. 1784 a limit on the current estate tax which states that no tax would be imposed that reduced the net estate to less than $2 million. This effectively sets the threshold at $2 million and would not affect the tax paid by larger estates.

Effects

Unfortunately, the Department of Revenue has not provided estimates of the likely loss of revenue from each approach. Some years ago, it did provide a Senate working group the following chart. At the time, increasing the threshold to $2 million was expected to cost $81 million a year in lost revenue, increasing it to $5.5 million would mean a loss of $227 million a year, and increasing it to $11.2 million a loss of $295 million a year. Of course, the devil is often in the details and it’s not clear what approach to increasing the estate tax threshold the Department of Revenue was considering.

image

MassBudget has estimated that Governor Healey’s proposal to would cost the state $275 million a year in lost revenue and that 70% of this savings would accrue to estates larger than $3 million. It further estimates that Senator Cyr’s proposal would mean less than $90 million a year in reduced revenue with 90% of the benefit going to estates valued at less than $2 million. (We note that under this proposal, married couples would be able to plan to shelter up to $4 million from estate taxation.) The House Ways and Means Committee estimates that the House bill would cost $231 million a year in lost revenue.

Now it is up to the Senate to choose one of these approaches or come up with its own proposal. Then, unless it chooses the House plan, the two chambers will have to reconcile their two approaches. While we’re far from a resolution, it appears likely that the threshold will increase in some fashion.

Related articles:

What Should the Estate Tax Threshold Be?

6 Reasons to Keep the Massachusetts Estate Tax

Primer on the Massachusetts Estate Tax

Newsletter Sign Up

Contact Us

We’ve moved. But not far. Our new address is: 20 William Street, Suite 320, Wellesley, MA 02481

Contact Haley

Contact Steven

Contact Sarah Henry

Contact Michael

Contact Sarah Hartline

Contact Laura

Contact Patricia

Contact Jeffrey

Contact Harry