With Halloween just over a week away, perhaps it’s fitting that some states hope to cash in from the Grim Reaper via their death taxes. Sadly, Washington is among the few states still counting on death to fund certain programs. For example, the Tax Foundation recently reported that Washington has the highest death tax (estate) rate in the country. Perhaps more importantly, Washington is the only state without an income tax that imposes a death tax. As noted by a study released today, this could cause competitive challenges from our fellow non-income tax states.  

According to a new study by the National Bureau of Economic Research:

“We study the effect of state-level estate taxes on the geographical location of the Forbes 400 richest Americans and its implications for tax policy. We use a change in federal tax law to identify the tax sensitivity of the ultra-wealthy's locational choices. Before 2001, some states had an estate tax and others didn't, but the tax liability for the ultra-wealthy was independent of their domicile state due to a federal credit.

In 2001, the credit was phased out and the estate tax liability for the ultra-wealthy suddenly became highly dependent on domicile state. We find the number of Forbes 400 individuals in estate tax states fell by 35% after 2001 compared to non-estate tax states. We also find that billionaire's sensitivity to the estate tax increases significantly with age. Overall, billionaires' geographical location appears to be highly sensitive to state estate taxes.”

The study continues:

“For instance, Washington state enacted an estate tax in 2005 with a top rate of 20%, the highest in the nation. Thus, an individual with a $1 billion estate could potentially save up to $200 million in their eventual estate tax liability simply by moving from Washington to Oregon, or any other of the over 30 states without an estate tax . . .

Moving to avoid a high personal income tax will lower one’s tax liability resulting from the flow of income in that year and each subsequent year they remain in the state. But moving to escape an estate tax effectively avoids estate taxation on a lifetime of income flows net of consumption. Hence, it is quite conceivable that state estate taxes would factor into the tax and estate planning of ultra-wealthy individuals and could potentially affect decisions of the ultra-wealthy regarding where to live, especially as they get older.”

Along with the threat of incentivizing possible relocation to other non-income states, the Tax Foundation notes:

“Estate and inheritance taxes are burdensome. 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.”

Folks can’t escape death, but they could avoid the death tax Grim Reaper with a simple jump of the state line (relocating) while still breathing.