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Bury
the Death Tax
Virginia
needs to repeal its inheritance tax. Otherwise, the
Commonwealth risks driving off the entrepreneurs who
build businesses, create jobs and generate lots of
taxes.
Foes
of the inheritance tax scored a public relations
coup by dubbing the levy “the death tax.” The
phrase evokes ghoulish tax collectors slipping their
hands one last time into the pockets of the deceased
as they lie in their caskets. It’s a
powerful image, and it underscores the injustice of
taxing a businessman’s wages, profits and savings
all his life, and then coming back for one last
grab.
Traditionally,
the Internal Revenue Service has played the role of
the heavy. But now, with Congress phasing out the
federal inheritance tax, the State Department of
Taxation is taking on the role of grave robber.
While the federal tax soon will drop to zero, Virginia’s
top take will remain 16 percent. That’s not as
extortionate as the recent federal rate of 55
percent, but it’s hefty enough to damage Virginia’s
economy. The General Assembly needs to make the
repeal of Virginia’s
death tax one of the Commonwealth’s top budgetary
priorities – even if it means stalling on the
politically popular repeal of the car tax.
As
certain as are death and taxes, however, we can be
sure that defenders of the status quo will play the
class-warfare card. How, they will ask, can the
General Assembly put tax breaks for the rich in
front of tax relief for ordinary Virginians?
Speaking
as an ordinary Virginian who does pay car taxes, not
as a plutocrat likely to benefit from a repeal of
the death tax any time soon, I believe the
Commonwealth should eliminate the inheritance tax as
soon as possible. The issue is not one of
“fairness” – a slippery, chameleon concept –
but of economic growth. I’ll take a vibrant,
entrepreneurial economy over a $150 rebate on my car
tax any day. Most Virginians, I suspect, would
prefer a healthy economy that offers greater
opportunities to advance their careers or businesses
over a marginally bigger rebate check on their car
tax.
At
stake is Virginia’s vision for
economic growth. Will we rely on large, established
companies to continue investing in Virginia
--
or will we encourage entrepreneurial growth
companies to lead the way? Will we tolerate an
economy plagued by bouts of reengineering and
consolidation -- or do we want an economy energized by
the culture of invention, creativity and innovation?
Do we want a branch-plant economy, where decisions
are made elsewhere, or do we desire to cultivate
home-grown businesses with roots in the community?
Bacon’s
Rebellion has argued ad nauseum that the foundation
of Virginia’s
traditional economic
development strategy is
disintegrating. Big corporations are shifting
manufacturing and back-office operations to China,
India
and other developing nations, and Virginia
will find it difficult to rack up the kind of
big-business expansions that it landed in the 1990s.
The Commonwealth needs to create a business climate
that fosters the start-up and expansion of
entrepreneurial companies.
The
key to promoting entrepreneurial business is to make
Virginia
hospitable to entrepreneurs. Taxing the bejeebers
out of millionaires' estates, I submit,
will not endear the Old Dominion to these creative
risk takers. Two consequences of retaining the death
tax are entirely foreseeable: Many Virginia
entrepreneurs will “redomicile” to more
tax-friendly states. And fewer out-of-state
entrepreneurs will choose to move here.
Virginia
has maintained a death tax of 16 percent for years
on that portion of an estate over $650,000. The
levy was never contentious because the Internal
Revenue Service credited the state tax towards
payment on the federal tax. But everything changed
in 2001 when Congress instituted a phase-out of the
federal death tax. When the federal tax is gone, Virginia’s
estate tax will remain in place with no offsetting
credits. As it stands today, unless the General
Assembly acts, Virginia
will be one of only 15 states still taxing the dead.
Rich
people have always loathed the federal death tax,
but they couldn’t do much to avoid it short of
renouncing their U.S.
citizenship and moving to another country. Only a
few were willing to take such drastic steps. By
contrast, there are few barriers to changing one’s
state of residence. Plenty of Americans do that
already, buying houses and establishing residences
in zero-income tax states like Florida
instead of high-tax states such as
New
York
or Massachusetts.
With an income tax rate of 5.75 percent, Virginia
already creates ample incentive for wealthier citizens to
declare themselves Floridians for tax purposes. An
estate tax would incentivize even more tax flight to
places like Naples
and Boca
Raton.
It’s
a simple fact of life: Rich people are more mobile
than the rest of us. They have far more options
for legally avoiding taxes, and they can afford to
hire the top accountants and tax lawyers to tell
them how to do so. It’s no financial
strain to buy a house in Florida, and then fly back and forth to Virginia
-- many of Virginia's wealthiest citizens already do.
For that matter, it poses few difficulties to pick
up and move outright to another state.
As
a matter of economic policy,
Virginia
should be doing everything it can to encourage rich
people to move to Virginia
– not drive them away. Rich people are wonderful
to have around, even if they rarely invite the rest
of us into their mansions and onto their yachts.
Rich folk pay far more in taxes than they consume in
services. They donate time and money to local
philanthropies.
The
vast majority of super-rich people in Virginia
didn't inherit their money, they made it themselves.
Just check the biographies of the
Virginia 100 published annually by Virginia
Business. The same applies to the moderately
wealthy. As business men and women, most are
involved in the local business scene. They possess
indispensable knowledge of their industries along with fat
Rolodexes of contacts that enable them to assembly
top-notch management teams. Frequently, they invest in
local enterprises. Occasionally, they launch new ventures.
In
sum, rich people feed and nourish Virginia’s
communities and its entrepreneurial economy. And
entrepreneurial businesses drive the economy forward
-- benefiting not just the business owners but their
customers, their vendors and the communities they do
business in.
A
small number of businesses -- less than 5 percent --
accounted for the vast majority of economic growth
in the U.S. during the 1990s, according to the
National Commission of Entrepreneurship. The
commission found “entrepreneurial growth
companies,” whose employment employment had doubled between
1992 and 1997, in every region of the country. But
the proportion of such companies varied dramatically
between regions. The Washington-Baltimore labor market
area, which includes Northern
Virginia,
counted 7,156 such firms. Other labor market areas
in Virginia scored as follows:
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