Sunday, May 15, 2005

The Media and Taxes

Joel A. Schoenmeyer at Death and Taxes--The Blog had some nice things to say about my posting on the WSJ's reporting of the estate tax/basis step-up tradeoff. He then addressed the repeal of the "pick-up" tax credit in 2001. I agree entirely with his comments, but I think that the background of the repeal is worthy of further comment.

In essence, before the massive tax cuts enacted in 2001, the estate tax had a provision that granted a tax credit for state inheritance taxes paid. While there were limits to the credit, in effect it worked as a direct subsidy from the federal government to the states. After all, the states could enact a tax on estates that cost its citizens nothing because the tax paid to the state reduced the federal tax that would otherwise have to be paid on a dollar for dollar basis. At the end of the day, estates were no worse off than if the state had not enacted a tax. Since it cost their citizens nothing, virtually all of the states enacted an estate tax equal to the pick-up credit.

The reason that the credit was abolished in 2001 was that the tax cutters could claim that their bill cut taxes by about $9 Billion a year less than was actually the case. Of course, the $9 Billion came out of the pockets of the various states. (There was some poetic justice: Brother Jeb's state relied on the pick-up tax for about 5% of its revenue. Thus, the tax cuts pushed by Big Brother George forced him to raise taxes on the citizens of Florida.)

Needless to say, none of this was reported at the time by the mainstream (meaning, non-technical) media. Admittedly, in the context of the orgy of tax cutting then taking place, it was fairly small potatoes. Yet, it illustrated the high degree of disingenuousness exhibited by the tax cutters and should have been worthy of mention.

I agree with Schoenmeyer's comments as to the ripple effect that the repeal of the pick-up credit will have, but there's another affect that's important. Specifically, it is relatively easy for an individual to abandon domicile in one state and establish domicile in another. As the states begin to replace the old pick-up tax with a real tax, they will incentivize some of their citizens to abandon their current domiciles and to move to states which do not enact such provisions. Of course, the citizens who will be most significantly affected by such tax enactments are often wealthy and retired, that is, a group that is perhaps the most mobile segment of the general population. By enacting an independent tax on estates, states could be playing with fire because if the well-to-do begin to abandon their (relatively high tax) domiciles with a vengeance, there will be a reduction in income tax revenues as well. On balance, the states could actually end up with reduced revenues on a net/net basis.

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