Estate tax cuts are one of top priorities in Legislature's tax proposal

Nan Madden
May 08, 2017
We look to our policymakers to best position Minnesota to build on our state's strengths and expand economic security to every community, while also being prudent given the uncertainty of these times.

Given that, we don't think big tax cuts for a small number of large estates should take priority over other choices that would have a greater benefit for Minnesotans across the state, such as making child care and college education more affordable, funding services for the elderly and people with disabilities, or expanding the Working Family Credit so that Minnesota workers - including those just starting their work lives - can move up a few rungs on the ladder to the middle class.

Yet an estate tax cut is the second largest component in the proposal adopted by the legislative tax conference committee. If enacted, this would provide large tax cuts to a small number of the wealthiest estates while undercutting a level playing field for Minnesota taxpayers. The proposal would more than double the amount of an estate that is exempt from the estate tax - the exemption amount would go to $5.49 million for one person or nearly $11 million per married couple, and then increase each year with inflation.

That's $162 million in tax cuts over the two-year FY 2018-19 budget cycle and $195 million in FY 2020-21. Cuts to the estate tax only reach a small number of high-value estates and primarily benefit high-income individuals; only about 1,100 estates paid any Minnesota estate tax in 2014. This highly concentrated tax break would reverse course on the progress Minnesota has made in making our tax system more equitable across income levels.

Another problem with the proposal is that it would undermine the estate tax's important role in creating a level playing field among taxpayers. The estate tax serves as a backstop to the income tax, as it applies to unrealized capital gains, which is the increased value of appreciated assets - such as stocks - held by the estate. These asset gains would otherwise never be subject to tax. But the more that policymakers erode the estate tax, the more unrealized capital gains in large estates will go untaxed. That's a tax benefit that isn't available to Minnesotans with incomes only from wages, or who have capital gains that they realize during their lifetimes.

And the amount of unrealized capital gains in large estates is significant. The Center on Budget and Policy Priorities finds that nationally, unrealized capital gains are about one-third of estates worth between $5 million and $10 million, and are 55 percent of the value of estates worth more than $100 million.

Minnesota has already cut our estate tax. Changes passed in 2014 increased the exemption amount, which will reach $2 million in 2018, and the exemption is already $5 million for certain family-owned businesses and farms. The 2014 changes are expected to reduce the number of estates subject to the Minnesota estate tax by 37 percent and estate taxes paid by 30 percent.

In short, the proposed estate tax cuts would dedicate nearly 10 percent of Minnesota's budget surplus and benefit a relative few. Those are resources that would be better spent on more balanced and broad-reaching tax and budget decisions that prioritize making Minnesota a place where everyone can thrive.

-Nan Madden