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 Many states have moved away from taxing assets after people die
because of the harm to family businesses and farms, but a new proposal before
state lawmakers would double Illinois’ estate tax.
House Bill 3920 would hike the existing state tax on estates of over $4 million
to 9.95% from 4.95%. Unlike neighboring Wisconsin, Michigan, Indiana and
Missouri, Illinois is one of just a dozen states that still have an estate or
inheritance tax. Tax Foundation analyst Katherine Loughead noted, “The top
marginal estate tax rate under this proposal would become the highest in the
country at 21%.”
While the bill’s sponsors intend the extra revenues to be used to support
Illinoisans with disabilities, hiking the estate tax would squeeze family
farmers, reduce the accumulation of productive assets, encourage spendthrift
behavior, fuel tax avoidance and evasion, and drive wealth to other states.
Increasing the estate tax would harm all Illinoisans, not just Illinois’
wealthiest families
When someone dies, the federal government taxes the estate by up to 40%. Then
Illinois piles onto that with more taxes of up to 16%.
The Tax Foundation notes the harm of estate taxes: “They disincentivize business
investment and can drive high-net-worth individuals out of state. They also
yield estate planning and tax avoidance strategies that are inefficient, not
only for affected taxpayers, but for the economy at large. The handful of states
that still impose them should consider eliminating them or at least conforming
to federal exemption levels.”
Research shows higher estate tax rates increase efforts to avoid those taxes and
reduce wealth accumulation. People employ more complex estate planning
techniques that carry economic costs.
By reducing savings that finance new investments, the estate tax reduces the
payoff to working. Estate and inheritance taxes also discourage
entrepreneurship, discourage business expansion and encourage early retirement.
This means fewer jobs and lower wages for all Illinoisans.
Estate taxes can also threaten family farms, with combined federal and state tax
rates potentially exceeding 50% of the land’s value. Farms tend to be asset rich
and cash poor, forcing families to sell assets to make estate tax payments.
Research from the American Farm Bureau Federation showed that at current
farmland prices in the Corn Belt, an exemption level of $3.5 million would mean
Illinois farms of 473 acres would be hit with an estate tax, or 31% of Illinois
farms. An exemption level of $5.8 million would end up hitting Illinois farms
with 784 acres, or 21% of Illinois farms.
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This means that at Illinois’ $4 million exemption
level, a significant number of farming operations could be subject
to this tax. Given that family farms dominate the state, with more
than 94% of farms family-owned, the hike in the estate tax would
make it more difficult for many families to pass their farms from
one generation to the next.
Increasing the estate tax would exacerbate
Illinois’ exodus
Increasing the estate tax would also aggravate the Illinois exodus.
In 2020, the state saw a seventh consecutive year of population loss
and its worst single-year loss since World War II. Illinois lost
more than 253,000 residents during the past decade, more than triple
any other state.
Illinois is continually ranked as a prime place to abandon by moving
companies. A 2016 poll by the Paul Simon Public Policy Institute
showed high taxes are the top reason Illinoisans give for wanting to
leave the state.
Doubling the estate tax would likely encourage wealthy Illinoisans
to move and could push more retirees out of the state. Research
shows estate and inheritance taxes have a large impact on the
location decisions for those at the top of the income distribution.
When people leave a state, they take more than just their incomes or
assets with them. Businesses take jobs to other states. Losing
residents and workers means lower consumer spending resulting in
less tax revenue. Policies that erode the tax base are
counterproductive because they undermine the state’s long-term
fiscal future.
The costs associated with estate and inheritance taxes are the
reasons most states have moved away from them. Illinois is one of
only 12 states to still impose an estate tax. Six other states
impose an inheritance tax on assets transferred from a deceased
person’s estate.
Illinoisans already shoulder a heavy tax burden, with the
second-highest property taxes in the country and the highest state
and local tax burden in the nation. Increasing the estate tax would
make Illinois worse off when the state economy can least afford it.
Lawmakers should instead focus on fixing the fiscal issues plaguing
the state, such as ballooning pension debt and chronic deficits.
Those moves, outlined in Illinois Forward 2022, would make Illinois
a place where people want to live, work, play and stay.
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