The writer, of Omaha, is executive director of the Platte Institute for Economic Research.
This fall, Kiplinger, a personal finance magazine, ranked Nebraska among the 10 worst states for retirees, in part because Nebraska is one of only eight states that still levies inheritance taxes.
The Platte Institute has supported and will continue to support efforts to repeal Nebraska’s inheritance tax. Considering the total burden imposed by both the federal and Nebraska’s state-based death tax, Nebraska ranks fifth in the nation for the highest death tax rates, with 46.7 percent taken by taxes. The state portion of that total can range up to 18 percent.
Ultimately, there is a fundamental fairness issue in the debate about death taxes. The deceased have already paid taxes on the inheritance they seek to leave to future generations. But beyond the fairness of taxing death, Nebraska legislators need to take a hard look at the economics of it.
Opponents of repealing an inheritance tax endeavor to frame the issue with class warfare. But the problem with that argument is the individuals who bear the brunt of the inheritance tax are not the ultra-wealthy — they are family farmers and small-business owners.
Most of Nebraska’s farms are family-owned, and the inheritance tax makes passing property from one generation to the next complicated and sometimes impossible. About three-fourths of all farm income is in the form of farm-related assets. The result is that, to pay death taxes, the next generation of farmers has to sell land, equipment or, in some cases, the entire operation.
Small-business owners face many of the same challenges as family farming operations because much of their income is tied up in business-related assets. The result is that the next generation becomes liable for the inheritance tax and must sell all or part of the business just to pay the tax bill. If the business does survive, it is likely to be much less productive with fewer resources to retain or create jobs.
Under both cases, paying this tax for either farmers or small businesses reduces the amount of capital readily available to invest down the road, smothering innovation and entrepreneurship.
Inheritance taxes also play a role in driving migration out of the state. In a study by the Ocean State Policy Research Institute, it was concluded that “the most significant driver in out-state migration is the estate tax.”
This is particularly detrimental for Nebraska, whose population growth was well below the national average in recent years.
Part of the challenge to repealing the inheritance tax in Nebraska is the way it is administered. Nebraska structures it differently than most other states. As the tax is collected and administered by the county where the deceased’s property is, the property is evaluated and priced based upon the fair market value at the time of death. The tax must be paid to the county within one year of the time of death, with interest on unpaid taxes rising as high as 14 percent.
Counties, including Douglas, have relied on the revenue from inheritance taxes and have been some of the most vocal opponents of a repeal.
With Douglas County recently approving $5 million of its inheritance tax revenue being applied to the UNMC Cancer Center, one has to wonder if the revenue from inheritance taxes has kept county governments from tightening their belts the way families and the state government have had to in our present economy.
Nebraska’s inheritance tax is one that hurts Nebraska’s economy far more than it helps. As long as Nebraska preserves an inheritance tax, it will deter economic innovation and growth. It also weighs down existing small businesses and family farms to the point where they may be forced to move to another state or cease to exist.