A Maryland tax break for ‘middle class millionaires’

Gubernatorial candidate Larry Hogan (R) has a television ad declaring that more than half of Maryland’s residents would leave the state if they could, because of heavy taxation and government regulation. This allegation was blunted recently when Gov. Martin O’Malley (D) and the Maryland state legislature changed the state’s estate tax, increasing the wealth transfer tax exemption to conform to the federal estate tax threshold. Whether this is a change that Maryland voters want will be just one more issue for them to decide when they go to the polls next month. However, as someone who is frequently asked, from a tax perspective, whether it is better to live in Maryland, the District of Columbia, or Virginia, I will have to reevaluate my usual preference for the Old Dominion, at least when considering the most tax-efficient place to die.

{mosads}The old Maryland law taxed residents’ estates worth more than $1 million at 10 percent, provided the deceased’s property was left to linear decedents, e.g. children, grandchildren, stepchildren, etc. Under the new law, this increases over several years to ultimately match the federal exemption. Beginning in 2015, the exemption cutoff increases to $1.5 million, $2 million in 2016, $3 million in 2017 and $4 million in 2018, before matching the federal exemption in 2019, which is projected to be $5.9 million. The state exemption would then match the federal exemption for subsequent years and would be adjusted for inflation each year.

Although Virginia and 41 other states impose no “death tax” whatsoever on their residents, Maryland’s increase of its exemption cutoff point from $1 million to almost $6 million by 2019 will nevertheless be an important factor in keeping wealthier individuals in Maryland, individuals who are likely to maximize the income, property and sales tax revenue going to Annapolis.

The Tax Foundation, a nonpartisan research institute in D.C., estimates Maryland lost $5 billion in personal income tax collections from 2000 to 2010 due in part to upper-income individuals moving to states with lower taxes. Recently, Montgomery County Executive Ike Leggett confirmed this problem in a speech to the Montgomery County Chamber of Commerce. He pointed out that 700 to 800 households in the top 3 percent of income earners in the county leave Maryland each year because of the combined income and estate tax burdens on residents. These trends indicate that by revising its estate tax exemption cutoff, Maryland is not just caving in to wealthy residents seeking lower taxes but is recognizing that it has to act to curtail an exodus of its citizens who account for the majority of the state’s tax revenues.

Given the substantial needs of Maryland residents in need of government assistance, such as the 35 percent of Montgomery County school children receiving free or subsidized lunches, the state must keep its wealthier residents who can support social services and maintain government infrastructure. More “middle class millionaires” staying in Maryland means that municipalities and the state government are better able to provide important aid and services for the less affluent. That is why Maryland lawmakers did the right thing in providing a tax break for a class of residents who, at first glance, would not appear to need tax relief.

Williamson is executive director of the Kogod Tax Center at the Kogod School of Business at American University.