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Estate Taxes Vital Tool for Fighting Income Inequality, Raising Revenue

Alice and Jim Walton, above, are each among the 20 richest people in the world, each valued at over $32 Billion. They owe their wealth to the inheritance of the estate of their father, Sam Walton, of Wal-Mart fame.

It’s no secret that the past thirty years have been tough ones for state and local governments looking to preserve revenue for key public services. The ideologically-driven assault against taxes of any stripe have not only reduced the ability of state and local governments to fund vital public safety, infrastructure, and public health initiatives, but it has also hampered the ability of governments to promote equality of opportunity in their jurisdictions, a key goal of an equitable system of taxation. An especially damaging tax reduction has been the 2001 Bush Administration estate tax reductions.

The value of an estate tax is simple to understand from an equity standpoint: the most straightforward way to limit intergenerational concentration of wealth is to limit the ability of the rich to bequeath large sums of money to other rich folks like themselves (usually their children).
Unfortunately, anti-government advocates have worked hard to preserve the fortunes of wealthy children by launching a fierce war of words against it. Giving it the new label of the “death tax,” these right-wing radicals shifted the conversation from the problem of income inequality to a sympathy for the unfortunate rich man who was being “taxed twice” on his income through a tax that is levied after his death.

No matter that federal estate taxes only apply to estates of $5.45 million and above in 2016. No matter that this argument of “double taxation” is never mentioned around sales taxes, which fall heavily on the poor. No, the estate tax has become a particular source of derision by anti-tax advocates, leading up to the 2001 federal cut that applied to the very rich who were then subjected to the tax.

Lost in the important conversation about income inequality, however, is the fact that the estate tax is also a significant revenue generator for state and local governments. When the federal government gutted its estate tax in 2001, a number of state governments decided to institute their own estate taxes. These taxes apply to estates at their lowest from $675,000 and up (New Jersey) to their highest at $5.45 million and up (Delaware, Hawaii, and Maine).

These taxes have proven to be significant revenue generators. In 2015, New York and Pennsylvania each raised over $1 billion in revenue from their estate taxes. Estimates by the Center on Budget and Policy Priorities say that if California instituted an estate tax with a fairly high exemption of $3.5 million (meaning it would only apply to estates worth that much or more), the state would raise a similar amount per year. A lower exemption that applied to all millionaires would generate $1.7 billion in revenue a year. For perspective, that is the same size as the state’s annual expenditures on business, consumer services, and housing.

The estate tax is an equitable, vital tool for policymakers to both reduce income inequality and generate revenue for public services. States like California should seriously consider reinstating the estate tax if they are truly committed to ensuring an even playing field for all their residents and not leaving dollars on the table that can be put to good public use.

Rob Moore is a Master of Public Policy candidate at the Goldman School of Public Policy and an editor at PolicyMatters Journal where this article was originally posted.