By Sam Waltz
The not-so-curious thing about tax policy is that it tends to create the behavior that it incents.
Wealth and income, like air and water, have certain fluid characteristics that allow, even encourage, movement.
Hence, it should come as no surprise that when the State of Delaware decided it wanted to use its “death tax” to confiscate from the estates of the wealthy who die in Delaware, it forced many of those wealthy to relocate to other jurisdictions that don’t tax wealth and income quite so disproportionately.
As a result of its “death tax,” which the state more decorously calls an inheritance tax, many Delawareans of means sufficient to be hit by the “death tax” ($5 million for an individual, $10 million for a couple) relocate themselves ““ and their living, and spending ““ outside of the First State.
It’s obvious that, like many, they want simply to increase what they leave their heirs and decrease the onerous second and third taxation of money that already has been taxed when earned.
Because it often disproportionately hits small-business people and farmers whose wealth is an income-producing asset for their families which creates jobs and generate income, those also are people who want to avoid selling a business or an asset to pay the tax man.
We in the State of Delaware are poorer for it, both in the quality of life reduced by the departure of good neighbors who abandon Delaware, as well as by the loss of their living and spending here. All because the state has encouraged it.
Receipts from the State from Delaware’s “death tax” peaked at $16.2 million in 2011, shortly after the tax was enacted, and they have declined ever since, as advisors have had greater time to counsel clients on tax planning.
Delaware politicians in June 2009 claimed that Delaware would receive $25 million a year in “found money” by the enactment of the “death tax.” In the State’s fiscal 2014, ended last June 30, instead the State harvested only $1.3 million from those who did not have the foresight to leave Delaware before dying.
Delaware Sen. F. Gary Simpson introduced a bill in the Delaware General Assembly this winter to repeal the tax. Simpson, a Milford Republican, regrettably has less chance of seeing his bill passed than Israeli Prime Minister Benjamin Netanyahu had of being greeted this month at Reagan International Airport by a smiling Barack Obama with a dozen roses.
One advisor called to counsel such clients of wealth is F. Peter Conaty Jr., a trusts and estates attorney at Delaware’s largest law firm Richards Layton & Finger.
Five of his clients have changed their states of residence from Delaware to elsewhere because of the “death tax,” he told the Delaware Business Times. Those five paid an average of $50,000 a year in State income tax, which means that the State has voluntarily surrendered $250,000 a year in State income tax proceeds just from the five clients of only one attorney.
A Delawarean who pays $50,000 in income tax is earning about $1 million a year in taxable income.
It may be the impact of the “death tax” alone, or it may be that Delaware’s “death tax” on top of its onerous personal income tax rates simply ““ in the semantics of Malcolm Gladwell ““ become the “the tipping point.”
Nevertheless, the impact seems real, verified both anecdotally by Mr. Conaty and in the data from that State, which saw only about 5 percent of its annual projections realized last year.
We believe the State of Delaware would be well-advised to consider the repeal of its “death tax.” ♦
