Arkansas reaped a windfall when a Walmart founder, James L. Walton, known as Bud, died in 1995 with a fortune estimated by Forbes at $1.65 billion in today’s money. The next year, state estate tax receipts jumped 425 percent, to about $183 million in current dollars.
In an age when bigger fortunes are being made, the states’ prize is getting richer. Research by Enrico Moretti of the University of California, Berkeley, and Daniel J. Wilson of the Federal Reserve Bank of San Francisco estimates that if Jeff Bezos of Amazon died today at his home in the Seattle suburbs, the state tax bill on his estate, estimated by Forbes at more than $100 billion, would add up to almost $12 billion. Washington State’s entire budget for two years is $52 billion.
There’s a hitch to state estate taxes: The rich can move to avoid their reach. That makes counting on the revenues a bit of a crapshoot. If an aging Mr. Bezos moved before he died, establishing his residence in California, his fortune would produce no estate tax revenue.
And yet the payoff from estate taxes can be so big that it’s worthwhile for states to impose them anyway.
The study by Mr. Moretti and Mr. Wilson, to be published by the National Bureau of Economic Research on Monday, explores the main drawback of this kind of wealth tax: The rich will deploy all sorts of tactics to avoid them. The arsenal includes charitable bequests, trusts, the creative valuation of assets and, apparently, moving out of state to die.
The older the wealthy get, the less likely they are to continue to live in states that charge estate taxes. Mr. Moretti and Mr. Wilson estimate that from 2001 to 2017, a 40-year-old billionaire on the Forbes list had a 22 percent chance of living in a state with an estate tax. By age 70, the odds were only 14 percent. By age 90, they had fallen to only 9 percent.
But over the long run, Mr. Moretti and Mr. Wilson conclude, the state estate tax can be a useful tool. From 1982 to 2017, the death of the average Forbes billionaire generated $165 million in revenue in states with estate taxes. Lots of billionaires moved to avoid them. But estate taxes raised more money for states that had them than they lost in income-tax revenue when billionaires left.
“The behavioral response is very high, but despite the strong response it is still worth it for the states,” Mr. Moretti said.
Taxing the wealth of America’s ultrarich is a central issue in the campaign for the Democratic presidential nomination. Senator Bernie Sanders proposed an annual tax ranging from 1 percent on fortunes worth $32 million to $50 million to 8 percent on those above $10 billion. Senator Elizabeth Warren is calling for a comparatively modest annual tax of 2 percent on fortunes above $50 million, with an additional 1 percent on wealth over $1 billion.
Not all Democrats are on board. But even Democratic economists who have pushed back against these ideas say federal estate and gift taxes, the only taxes on wealth in the United States today, could be applied much more broadly and aggressively. reducing exemptions and increasing tax rates on large estates.
Currently, federal estate and gift taxes apply beyond a threshold of $11.4 million per person. They are levied at a top rate of 40 percent and raised $23 billion in 2018.
Unlike the issues with state taxes, the rich can’t move out of the country to avoid federal estate taxes because United States citizens are liable for the tax no matter where they live.
For many years, there was no reason for rich people to flee state estate taxes because they paid the same no matter where they lived. Before 2001, the government offered a federal tax credit to cover the state tax liability. Many states passed estate taxes that exactly matched the available federal credit.
But President George W. Bush’s tax-cut package of 2001 phased out the credit over the next three years. And as the federal system changed, a wealthy person’s state of residence started to matter. By 2010, more than one in five billionaires from states that kept estate taxes had moved to a state without one, while only 1.2 percent had moved in the opposite direction. And by 2017, only 13 states had an estate tax.
Gabriel Zucman, an economist at the University of California, Berkeley, who with his colleague Emmanuel Saez has advised the Warren campaign on taxation issues, argues that “people who dislike taxes like to create circumstances for tax competition.”
If the rich can avoid taxes by moving to the lower-tax state or country next door, states and countries will race to cut taxes to poach one another’s wealthy. Such competition is the main reason European countries have all but abandoned wealth taxes, Mr. Zucman said.
Still, Mr. Moretti and Mr. Wilson pointed out that for most states the race to the bottom is probably pointless: The typical estate tax of 16 percent yields more revenue than the income tax that the states would have collected in the interim from the billionaires who fled.
In states without an income tax, like Florida and Texas, the argument for the estate tax is straightforward: There is no income tax revenue to lose if billionaires leave. But even in Arkansas, which stopped collecting an estate tax in 2005 and was home to five billionaires in 2017, the income tax revenue lost would be only about half of what the state would reap with a 16 percent estate tax, Mr. Moretti and Mr. Wilson estimate.
While the estate tax could generate additional losses if departing billionaires took their companies, investments and charitable contributions with them, Mr. Moretti argues that it is not likely that an aging Mr. Bezos moving to, say, Texas, will take Amazon with him. And estate taxes decades down the road seem unlikely to influence where young entrepreneurs decide to live.
The Moretti-Wilson argument doesn’t apply only to billionaires. In all but eight states, a 16 percent tax applied to estates larger than $5.5 million (the federal threshold before the 2017 tax law) would generate more money than would be lost in forgone income taxes. And if the merely rich were only half as likely as Forbes billionaires to cross state lines fleeing the estate tax, every state would gain from imposing one.
If all states imposed an estate tax, of course, the rich would have no choice but to pay it. Mr. Zucman suggests that an easy way to maximize states’ estate tax revenues would be to reintroduce the federal credit, eliminating interstate tax competition.