Repeal Rhode Island’s death tax

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During the past 20 years, nearly 110,000 Ocean State residents have exited the state, never looking back. They have taken their capital with them, costing Rhode Island’s economy roughly $1 billion.

Of course, some former residents left for warmer climates. But others have left because of Rhode Island’s inhospitable tax climate — one of the ten worst in the country, according to the Tax Foundation’s 2011 State Business Tax Climate Index.

One of Rhode Island’s most onerous anti-business taxes is its estate tax, or death tax as critics correctly call it. If the legislature doesn’t repeal this tax — currently the third highest in the nation, after Ohio and New Jersey — Rhode Island will see thousands of additional people and billions of dollars leave the state in the coming years.

Initially Rhode Island’s estate tax was linked to the federal estate tax via a tax credit, which allowed Rhode Island and other states to “pick up” revenue from the federal estate tax without imposing a separate state tax. This credit was eliminated in 2005 after Washington started reducing the federal estate tax rate, which fell to zero last year.

Many states simply learned to get along without the estate tax revenues. Florida, for example, the top destination for departing Rhode Islanders, amended its constitution to bar the establishment of a state death tax.

Rhode Island did not. State legislators decided that if Washington wouldn’t help them “sock it to the rich,” they would do it on their own.

The tax requires the heirs of anyone with more than $850,000 in total assets (including business assets, homes, automobiles, boats, stocks and bonds, savings accounts) to pay the Department of Revenue — in cash — up to a statutory maximum of 55 percent of the total value of all assets (including those assets below the $850,000 exemption).

Think about friends and neighbors who are close to retirement and own a modest but nice house, two cars, maybe some artwork, a boat and have money invested in a 401(k) retirement plan. They will likely owe estate taxes.

Think about family business owners. According to William T. O’Hara, executive director of the Institute for Family Enterprise at Bryant University, three quarters of Rhode Island companies are family businesses. Only about a third successfully pass from the founding generation to the next, he told the Providence Journal last year; just 13 percent make it to the next generation.

As we have seen elsewhere, one big reason is the estate tax.

It should come as little surprise that Rhode Island’s estate tax has helped hasten the exodus of thousands of Rhode Islanders to other states. In fact, in the years following the establishment of the state death tax, Rhode Island lost some $150 million annually in income due to the exodus of residents to other states, a 77 percent increase from the roughly $84 million a year the state was losing before the separate tax existed — when warm weather was the primary reason most people left.

When business owners pull up stakes, the state not only loses income, it loses capital and jobs. In Florida, capital income relative to the national average increased following the repeal of its estate tax, as entrepreneurs invested their funds and built businesses. In Rhode Island, capital investment declined by 10 percent after the death tax was imposed.

According to the best estimates of the Ocean State Policy Research Institute, years of out-migration and shrinking capital has decreased Rhode Island income tax revenues in 2009 by roughly $94 million and sales taxes by approximately $17 million — an amount equal to nearly 40 percent of the $290 million state budget deficit projected for 2011-2012.

Compare this to the $27 million the state has collected through the tax in 2009.

The tragedy here is that Rhode Island’s failed tax-the-rich scheme is mostly hurting working people: those who need the jobs that family businesses create and those who need the public services income taxes finance.

Those who the politicians had in their sights moved to Florida. The best solution to this tragedy is to repeal the estate tax.

Bill Felkner is founder of the Ocean State Policy Research Institute, a nonprofit, nonpartisan research and educational organization based in Providence. Dick Patten is president of the American Family Business Institute, a trade association of family business owners, family farmers, and entrepreneurs working for estate tax repeal.