Virginia Death Tax Would Be Fairly Narrow

by Hans Bader

A few days ago, I wrote about legislation to reinstate Virginia’s estate tax. The Tax Foundation has informed me that the tax contained in the bill would affect fewer households than in most of the states that still have an estate tax. (Most states no longer have an estate tax at all).

This matters, because I incorrectly wrote that the tax would “affect the inheritances of many middle-class people.” Well, it turns out it’s not that many. That’s because the bill indirectly incorporates by reference a $10 million exclusion — even though that is not mentioned anywhere in the language of the bill itself.

As the Tax Foundation told me, after I emailed them my blog post, the bill’s language “could be clearer” about that, and “probably should be,” but it apparently does have the effect of incorporating a $10 million exclusion. So unless you have a relative with $10 million, it probably won’t affect you.

(Because the bill itself did not mention such an exclusion, many commenters at Richmond Sunlight and elsewhere had assumed that it would affect many Virginia households, especially in northern Virginia, where homes are quite expensive, and a typical home in many neighborhoods costs over a million dollars)

Only 12 states have an estate tax;  most states have abolished theirs. As the Tax Policy Center notes, “Delaware and New Jersey repealed their estate taxes on January 1, 2018. Kansas, North Carolina, Ohio, Oklahoma, and Tennessee also recently repealed their estate taxes.

In 2007, the Virginia legislature allowed the state’s estate tax to expire. Legislators cited arguments by the Tax Foundation and others that death taxes are harmful to a state’s fiscal  health. The Tax Foundation says death taxes “reduce investment,”  “drive wealthy taxpayers out of state” (cutting their income tax revenue), and consume time and money through “estate planning and tax avoidance strategies” that “create dead-weight losses.”

Virginia is a much more liberal place now than it was in 2007. So the legislature might conceivably change its mind about the death tax. The legislature was Republican in 2007, and Republicans supported eliminating the death tax — as did a number of moderate Democrats.

Now, the Democrats control both houses of the state legislature. Many of the moderate Democrats who supported repealing the estate tax in 2007 are gone from the legislature, replaced by progressives. And a sponsor of the bill to reinstate the estate tax is the chair of the House Finance Committee, and thus a very influential figure.

Finally, neighboring Maryland and the District of Columbia, unlike most of the country, have death taxes. So Virginia legislators may assume that wealthy people in northern Virginia can’t so easily flee across the border to escape the estate tax. Having to flee a longer distance to escape the tax may reduce the number of rich people who leave the state (although some will still leave for distant states like Florida that have no estate tax). That might well reduce the state’s lost income tax revenue from imposing an estate tax.

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8 responses to “Virginia Death Tax Would Be Fairly Narrow

  1. Ten dollars or ten million dollars,,, the State has more than enough revenue…
    PS,,, and since when should people who work hard, save hard, sacrifice, do 70 hour weeks, have an extra tax placed on their estate…
    Let’s face it, some people work hard, and some are lazy bums, or folk who make bad personal decisions,,, no reason the responsible hard working guys estate should have to pay extra…

  2. Thank you for this clarification. Because Virginia income tax law is written to be largely in conformity with the feds, the statutes are set up to reference federal law and, often, only those who work with tax law day in and day out can pick up these nuances. Hopefully, all those people who have gotten up in arms over this issue will see this clarification and breathe a little easier.

  3. I know far more about income taxes, business taxes, etc. than I do about the inheritance tax. It sure never came up when our parents passed. The last time I really focused, my recollection is that it is driven by federal rules, but one the exclusions under federal rules is a state inheritance tax. So it was in Virginia’s interest – and cost the taxpaying heirs nothing extra – if Virginia kept its inheritance tax on the books. The estate, if tax was owed, simply split it between the feds and the state. And as long as that is the way it works, Virginia might as well keep it intact. But if the federal tax was zero, so was the state tax.

    Perhaps that is what changed and why Virginia did suspend its inheritance tax. Or perhaps nothing has changed, and Virginia is merely not counted as having its own estate tax because it only collects a “piggy back” portion that costs the estate nothing extra.

    When you first posted that was my thought, but it had been years since I looked at it and with the first week General Assembly fire hose running I didn’t do the research. I did go see Delegate Watts who mentioned to me the $10 million figure. Vivian is pretty good on this stuff and I tend to take her word. I await the formal fiscal impact review.

  4. Hans Bader –

    Thanks for your clarification and your recent posts that are a much needed public service. I hope they continue. You have the knack.

    The problem of the camel’s nose under the tent remains. There is history here.

    As you correctly say, “Finally, neighboring Maryland and the District of Columbia, unlike most of the country, have death taxes.”

    Both jurisdictions typically, if not exclusively, are deep blue. In Maryland, after a long string of Democratic governors, one of whom was an excellent governor, the last two Democratic governors were hard left, masters at the dragging their smelly camel body in behind their noses into everyone else’s home, lives, livelihood, and personal business.

    The leftist confiscation of other people’s money to fund leftist projects got so bad that moderate thoughtful blue voters helped to elect two Republicans in the 21st century, the first since the early 1960s. But this happened only after thousands of citizens of means fled Maryland to save what they had worked so hard to build for themselves, their family, and their dreams. Maryland has yet to recover. Beware Virginia.

  5. Any incremental tax on estates will result in wealthy people retiring elsewhere. Why this is hard for our legislators to understand is a mystery to me.

    Most states require that a person spend 183 or more days in the state to establish residency. If Virginia implements an incremental 10% estate tax then a person with a $20m estate would be able to move to Florida and buy a very nice $1.5m condo in Virginia to use 182 days a year. Their heirs would be $2m better off – $1.5m from the value of the condo and $500K not paid in state estate taxes.

    Steve seems to question whether this tax would be incremental or not. Hard for me to understand why only 12 states would have an estate tax if it were simply a matter of taking money that would have gone to the federal government.

    And, of course – there will be exclusions. Farms for example. Why a family farm is more precious than a family moving business is a mystery to me. But our empty suited politicians seem to want to sit in judgement of how the estate was earned and a yokel who inherited his farm is better than an entrepreneur who built a moving business I guess.

    People ask me why I don’t want to see government expand. It’s because the politicians who run the government are largely nit wits.

  6. 2. If the personal representative of any estate subject to the tax imposed by this chapter is not required by the laws of the United States to file a federal estate tax return, the personal representative shall file with the Department a return for the tax due under this chapter within the 270 days immediately following the death of the decedent.

    Okay – this is the heart of the bill. It does appear that VA would begin to collect an inheritance tax even on people with no federal liability. Virginia’s would no longer just be a “piggy back” tax. So this is a major change, albeit only for large estates….of which there are certainly some. When it is a “piggy back” tax the estate pays nothing extra, it just splits the payment between feds and state. THAT I had no problem with. Creating a state only tax?

  7. What might make an interesting blog article or two is how states that don’t have an income tax or sales tax or both – fare on their budgets.

    Do they have other revenue sources or do they just have far less government services?

    I think the Dems need to tread careful this session. There is no shortage of folks looking at “tax” proposals… and I can see the election talking points right now.

  8. The folks that get stuck are owners of smaller companies, usually still working and can’t pick up and leave to avoid the tax.

    I believe Death Taxes are intended to force privately held businesses to sell (to the “aristocracy” (the people / funds / investors with cash ready to buy at a fire sale)).

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