Economic Consequences of Tennessee’s Gift and Estate Tax by Arthur B. Laffer, PhD

Economic Consequences of Tennessee’s Gift and Estate Tax

By Arthur B. Laffer, PhD

Monday, March 19th, 2012

Tennessee is one of 19 states with a separate estate tax and one of only two states with a gift tax, which has caused the state to underperform in comparison to other right-to-work states and other states with no earned income tax, low corporate tax, and low overall tax burdens according to authors Arthur B. Laffer, PhD and Wayne Winegarden, PhD.
The cost Tennessee has paid for its gift and estate tax in lost economic growth and employment is staggering. Had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee’s economy would have been over 14% larger in 2010 and there would have been 200,000 to 220,000 more jobs in the state. And, the more robust economic growth would have benefited state and local government revenues adding between $7 billion and $7.3 billion to state and local coffers. (more)
http://www.laffercenter.com/economic-consequences-tennessees-gift-estate-tax/

Texas vs. California

Why so many people are moving from the Golden State to the Lone Star State by Chuck DeVore

Note: This article originally appeared at National Review Online on March 14, 2012.


One in five Americans calls California or Texas home. The two most populous states have a lot in common: a long coast, a sunny climate, a diverse population, plenty of oil in the ground, and Mexico to the south. Where they diverge is in their governance.


For six years ending in 2010, I represented almost 500,000 people in California’s legislature. I was vice chairman of the Assembly Committee on Revenue and Taxation and served on the Budget Committee. I was even a lieutenant colonel in the state’s National Guard. Before serving in Sacramento, I worked as an executive in California’s aerospace industry. (More)

http://www.texaspolicy.com/center/economic-freedom/opinions/texas-vs-california

Moguls Rent South Dakota Addresses to Dodge Taxes Forever-Bloomberg News Online

Here is an interesting article...

Bob

http://www.bloomberg.com/news/2013-12-27/moguls-rent-south-dakota-addresses-to-dodge-taxes-forever.html

The Great Minnesota Exodus Tax Acts of 2013

The Great Minnesota Exodus Tax Acts of 2013

As published in the St Paul Pioneer Press on December 27, 2013

Enjoy the read!!!

Bob Smith
Robert.L.Smith.3rd@gmail.com


https://drive.google.com/file/d/0B4g-dYJxw_wpUGdjNEVRRC15UW8/edit?usp=sharing

I was WRONG!

Letter to the Editor – I was WRONG...

In September, I wrote an article: The Great Minnesota Exodus Tax Acts of 2013 that is posted on www.gopherstatepolitics.blogspot.com. The article analyzed the adverse consequences of Minnesota’s new Edina income tax rate, gift & estate taxes, and referred to the warehouse tax on business.
Minnesota is ranked 45th in the Tax Foundation (www.TaxFoundation.org) 2013 State Business Tax Climate Index. My article suggested that with our new taxes, we might nose-dive to the bottom five in the next year’s index. The thinking being that we might be able to crack # 46...

I was wrong.

The 2014 Index has come out and we dropped to # 47. Wow! Not only did we plummet two rankings, but we were honored with special thoughts from the foundation. Minnesota suffers from complex, non-neutral taxes, with comparatively high rates. The 2013 Minnesota Legislature enacted a package of tax changes that reduce the state’s competitiveness, including a retroactive hike in the individual income tax rate.

Now, we are up against the big boys. Only New Jersey, California, and New York have worse state business tax climates and stand in our way as we claw towards the bottom.

But – take heart, Minnesotans – our legislature is known for its ability to achieve the "implosible".

Bob Smith 3rd
St. Paul, MN

The Great Minnesota Exodus Tax Acts of 2013

The Great Minnesota Exodus Tax Acts of 2013

By Robert “Bob” L. Smith, 3rd

Gift and Estate Taxes are money losers, plain & simple…

“Run, run, run for your lives – the legislature is in session!” Is an old political admonition, that is as true today, as it was then, especially if you’re a Minnesotan.  The Minnesota Legislature has enacted three new taxes that will combine to devastate the Minnesota economy going forward.

They are…

1.       The new special “Edina” individual income tax bracket of 9.85%, so named for the Wall Street Journal editorial, spoofing the legislature for going after the Edina mid-level executives.

2.       The new lifetime, cumulative “gift” tax coupled to the estate tax. The question is “gift” to whom? Arizona, Florida, Texas, our neighboring states? Minnesota and Connecticut are the only two states with a gift tax.

3.       The new ”expanded” sales tax known as the “warehouse” tax that goes after businesses performing warehousing and distribution functions. It’s so unique that apparently there is no other tax like it in the country. We’re number one!

A brief review of the immediate five-state business climate is in order as a point of departure for the following analysis, along with a sketch of tax policies for individuals. States of course need a robust private economy to generate growth, jobs, and the income that makes possible state and local government taxation. What is the current state of the business climate in Minnesota compared to our sister states? A recent CNBC report on the most favorable states to do business in, ranked South Dakota first, Texas second, North Dakota third, and Nebraska fourth. Another measure, the 2013 State Business Tax Climate Index published by the Washington DC- based Tax Foundation (www.TaxFoundation.org), ranked South Dakota number two, North Dakota 28, Iowa 42, Wisconsin 43, and Minnesota 45. Minnesota with the addition of the “warehouse” tax might well nose-dive to the bottom five next year.

With respect to individual income taxes it is similarly dismal. South Dakota locally and Florida and Texas in the southeast and southwest, respectively, have no state personal income taxes. Arizona has very low individual tax rates. Tennessee taxes only dividends and interest. Wisconsin and North Carolina have moved to, or are planning to move to, lower rates.

Federal individual income tax data (AGI) were formulated for a single person, over age 65 with social security, a modest pension, an IRA and some investment income. These identical data were then run by a tax accountant for each state. What a retiree might be dealing with in Minnesota, as compared to other states, is as follows: the comparable retiree in Arizona 61% less, North Dakota 73% less, Iowa 37% less, Wisconsin 36% less. Nebraska 9% less (See Table 1. Florida, Arizona, and Texas are added here as they receive the most “out-migration” from Minnesota.)

Now if state, gift, estate and inheritance taxes are added the picture becomes even gloomier. Forbes magazine this past year listed Minnesota as one of the states you do not want to die in. And, Forbes reinforced it for the current year. None of our neighboring states were listed. Iowa does have a somewhat outmoded inheritance tax, but it exempts lineal heirs such as children and grandchildren from the tax so that for practical purposes it has no such tax. Minnesota now has a cumulative gift tax combined with an estate tax that results in Minnesota having the worst, most onerous gift & estate taxes in the nation. Sorry, Connecticut, we have ousted you from your number one position.

Estate taxes are being phased out around the country. North Carolina just repealed theirs. Indiana has no estate tax and is phasing out their inheritance tax overtime. Tennessee eliminated its gift tax last year and is phasing out their estate tax by year end 2015. That leaves about a dozen plus states with estate taxes and a half dozen with inheritance taxes, two of which have both.

The Tennessee case is of special interest in terms of its potential lessons for Minnesota. Tennessee as a state had many good things going for it, including the fact that both political parties were strongly pro-growth. Nevertheless their economy continued to underperform. Why? A study dated March 2012 by Arthur B. Laffer and Wayne H. Winegarden, “The Economic Consequences of Tennessee’s Gift and Estate Tax,” supplied a convincing answer. The authors said that “Had Tennessee eliminated its gift and estate tax ten years ago, Tennessee’s economy would have been over 14% larger in 2010, and there would have been 200,000 to 220,000 more jobs in the state. And, the more robust economic growth would have benefited state and local government revenues adding between $7B and$7.3B to state and local coffers.”

A 14% larger economy and thousands more jobs over the next decade certainly would be a godsend for Minnesota. Adjusting for population, a rough bonus of $5.8B to $6B in revenues for state and local governments would be the result, an outcome that should obviously appeal to both the legislative and executive branches.

Minnesota is currently at the beginning of the gift tax debate rather than at the end. We have a chance to avoid a repeat of the Tennessee debacle. Connecticut is the only other state in the nation to have a gift tax and their exemption is twice that of Minnesota ($2M as opposed to $1M). The estate tax needs to go as well. Adding a gift tax to our estate tax at this economic juncture is counter-productive - indeed it is tantamount, along with the warehouse tax, to an economic suicide pact.

The Federal gift and estate tax exemption currently at $5.25M is substantially above that of Minnesota’s. Illinois’s is four times larger. Iowa’s inheritance tax (no estate tax) is zero for lineal heirs. Nebraska has no estate tax but a minimal inheritance tax for immediate relatives (See Table 2.) It does the average Minnesotan little good to have the federal death tax rate curtailed if the state steps in to negate the benefit of raising the federal exemption. It especially does Minnesota little good if other states do not follow suit and in fact reduce or eliminate their estate taxes. Again Arizona, Florida, Texas, North & South Dakota, and Wisconsin have no estate or inheritance taxes.

There is much more to the three new Minnesota taxes than just the negative economic effects. There also is the human side of this issue. The taxes hit hard at the senior citizens, their children and their grandchildren. Seniors will be hit hard because some will increasingly face the tough decision to leave Minnesota and their families for states that offer a safe haven from gift and estate taxation. Seniors want to be near their families but they also want to leave their children something. They have worked hard to achieve that end. When seniors feel more secure and even modestly affluent, the so-called “wealth effect,” they spend more which means more economic activity. Mr. Laffer states the wealth effect by one estimate may be as much as nine cents in expenditure for each dollar of wealth – that is, a senior may spend around one-tenth of their perceived wealth over the long-term. If they feel poorer, seniors may spend significantly less. Meanwhile the most ambitious young people, the entrepreneurs and the young professionals, may move to the west, or the Sun Belt, to escape the confiscatory taxes that cramp their aspirations.

Losing wealth (and people) to other states is obviously not good for Minnesota. Dislocating families is not pretty. Over taxing the so-called “rich” may be short-run good politics, but it has negative long-term human and economic consequences. Mr. Laffer points out that gift and estate taxes do not re-distribute wealth; they merely re-distribute population. Voting with one’s feet is not the referendum we want for Minnesota. The more wealth that flees the state, the less revenue there is to tax and the less attractive we are for the ambitious young and all but the most highly affluent seniors.

As for businesses, let’s not kill the geese that lay the golden eggs. The warehouse tax does not bode well for the Minnesota business climate and job creation. Nice politics, not so nice when the tax revenues slip. The warehouse tax is one of the worst measures passed by the Minnesota legislature in recent years and there is an overwhelming case for its repeal.

We as a nation want to bring back offshore businesses and their capital. We as Minnesotans should want to repatriate ex-residents and their funds that moved to other states to escape overwhelming taxation. One way to begin is by creating a tax friendlier place to enjoy living in and at all costs we should discourage further “out-migration.” We really need to put an end to the politics of class warfare. We will all lose if our most enterprising fellow citizens and prominent businesses leave the state. We will all benefit from sound economic policies and reasonable taxation.

Gift and Estate Taxes are money losers, plain and simple. They cost state and local governments lost tax revenues in amounts greater than gift and estate taxes bring in. The Wall Street Journal Estate Tax Editorial of August 20, 2013, awarded us – Minnesota – the grand prize for (tax) self-abuse. Why should we shoot our self in the foot and in the state wallet? We do not need to repeat Connecticut and Tennessee’s economic fiascos. Out with gift and estate taxes!

The Legislature ought to repeal the gift tax in its entirety, and, for good measure ought to enact a phase-out of Estate Taxes over a three year period. This did not occur during the September 13, 2013 Special Session.  The Governor and the Majority and Minority Leadership of both Chambers need to come out with an unequivocal position that these taxes will be eliminated in the 2014 Session.

Table 1

2012 State Individual Income Tax Comparison (Minnesota = 100)

State	Percentile	Difference
Minnesota	100	---
Wisconsin	64	-36%
North Dakota	27	-73%
South Dakota	No Tax	---
Iowa	63	-37%
Nebraska	91	-9%
Arizona	39	-61%
Texas	No Tax	---
Florida	No Tax	---

*A single person over 65 years old with a pension, social security, IRA & some investment income.

Table 2

2012 Estate & Inheritance Tax Comparisons ($3,000,000 Estate, Non-business, non-farm,

4 children as heirs)

Entity Federal	Estimated Estate Tax Owed - Non-business, non-farm
Minnesota (a)	$182,000
Wisconsin	None
North Dakota	None
South Dakota	None
Iowa (b)	None
Nebraska (c)	$28,400
Arizona	None
Texas	None
Florida	None

 (a) Minnesota $1M exemption applied (Minnesota Revenue Website Calculator)

(b) Iowa Lineal Heirs Exempt

(c) Nebraska 1% Rate for immediate family, $40,000 exemption/recipient

 **********************************************************************

The author, Bob Smith is a life-long resident of Minnesota with roots in the investment business.  He is available for interviews and further comment on these issues and encourages you to share this analysis with your local legislators for comment. He can be reached by phone at: 651-222-6888. Clips of any published articles based on this commentary and analysis may be mailed to: Bob Smith, 480 St. Clair Ave., St. Paul, MN 55102. Email at ROBERT.L.SMITH.3RD@GMAIL.COM and blog at http://gopherstatepolitics.blogspot.com