The first clue that there’s something wrong with repealing the North Carolina estate tax is that the effort begins with a distortion. Those who would eliminate it call it what it isn’t – “the death tax.”
No one pays a tax for dying. However, if the deceased was exceptionally wealthy, people who are very much alive may suddenly become very rich. That is called a windfall. It belongs to the lucky, and it should be taxed as surely as winners pay tax when they hit it big in the lottery.
Historically, only a few hundred North Carolina estates have been large enough to be subject to the estate tax each year. This year, the chances of an estate being taxed are even slimmer. The state exemption is tied to the federal exemption, which had been as low as $1 million. It now matches the new federal exemption: $5.25 million for individuals and $10.5 million for couples.
A fair tax
Previously, estates that paid a North Carolina tax got a credit against their federal obligation. Now, the estate will only get a tax deduction. Republicans say the loss of the federal credit means the state should drop its estate tax because very large estates will now face a higher total tax bill.
But why drop it? Middle-class North Carolinians pay tax on their incomes. Why not the rich?
And especially why now when the General Assembly is also moving to let the state’s Earned Income Tax Credit expire. The credit offers a modest and often temporary boost to low-wage workers. Nearly 907,000 North Carolinians claimed the credit in 2011, according to the Budget & Tax Center of the N.C. Justice Center.
In contrast, the few who benefit from estates above the estate tax’s lofty exemptions would seem to be a low priority for tax relief. But that has not stopped Republicans in the General Assembly and Gov. Pat McCrory from coming rapidly to their aid. House Bill 101, which calls for the estate tax’s repeal, has passed the House Finance Committee and looks likely to win approval overall.
The end of the tax would mean the state would forgo a projected $52 million in revenue for the 2013-14 fiscal year and a projected $300 million over the next five fiscal years. The forgone millions will multiply until perhaps some future lawmakers decide that the most fortunate should again contribute proportionally to the public welfare.
A promise to be kept
McCrory and other Republicans, however, are trying to cast the repeal as a populist measure. On the campaign trail, candidate McCrory pledged on his website: “North Carolina is now the only state in the Southeast with the death tax. This tax unfairly punishes those who would inherit their loved one’s possessions or business, forcing some families to sell off a small business or family farm just to pay the tax. As governor, Pat McCrory will fight to eliminate the death tax for North Carolinians.”
Now he’s governor and, as promised, he’s fighting for the beneficiaries of estates in excess of $5 million.
Casting this repeal as a service to small farmers and small businesses is as much a distortion as calling it a death tax. National IRS data show that for estate returns filed in 2010, only 3.6 percent of the estates’ value came from farm assets.
Republicans defend ending the estate tax by applying the all-purpose excuse for cutting taxes on the rich, the trickle-down theory. North Carolina, as candidate McCrorysaid, is the only Southeastern state with the tax. If it’s not repealed, North Carolina will lose rich families to its neighbors and be deprived, we are told, of “job creators.”
The tax is still generating revenue in 16 states outside of the Southeast. Those states are not worried about losing too many Vanderbilts.
Richard Nordan, a Raleigh attorney and CPA who specializes in estate planning and taxation, said the faux populism of repealing the estate tax is wrong, but it’s working.
“It’s a shame that the Republicans through propaganda have got the average Joe to think the estate tax is something evil,” Nordan says. “This is not a tax that any middle-class family is in any danger of ever seeing because of the exemptions.”
Now it’s likely the wealthy also will be out of such danger, and the state will be out millions of dollars.
In the interest of fairness, the death tax should live on in North Carolina.