In a State of the State address largely devoid of the progressive policy proposals he floated last year, New York Governor Andrew Cuomo decided this year to lay out a lavish buffet of tax cuts that disproportionately benefit large corporations and the rich. Cuomo is proposing $2 billion in “tax relief” phased in over three years, a package impressive enough to prompt the Republican State Senate Leader Dean Skelos to admiringly describe him as a “good, moderate Republican.” (Rule of thumb in the age of hyper-partisanship: If a Republican calls you a Republican, you are probably a Republican.)
The supply-side economic theories that underlie Cuomo’s tax cut proposals have had fat cats laughing all the way to the bank since long before Arthur Laffer devised his dubious curve, despite the fact that these theories have been widely discredited. And yet the Governor is determined to throw his muscle behind them. True, he does toss a couple of bones to renters and middle-class property owners, but the bulk of his cuts are reserved for wealthy individuals and corporations, benefitting Wall Street banks more than the ordinary taxpayers and manufacturers they purport to champion. While the cuts are unlikely to significantly increase economic growth or create jobs, they are certain to deprive the state of much-needed revenue at a time when the administration itself projects a $1.7 billion deficit for the current fiscal year. They’re also sure to increase inequality in a state that already ranks No. 1 in the nation in that unfortunate category.
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The most galling of Cuomo’s proposals, however, is a huge giveaway to the rich in the form of sharply reduced estate taxes. Currently, New York offers a $1 million estate tax exemption. In other words, wealthy New Yorkers can pass on an estate worth $1 million (after deductions) without paying a cent in estate taxes. For estates larger than $1 million, the rate starts at a whopping 5 percent and rises to all of 16 percent for estates larger than $10 million. (By comparison, workers in New York start paying a state income tax rate of 5 percent when they earn around $22,000.) Spouses are exempt from the estate tax, and a labyrinth of waivers, trusts and other exemptions allows wealthy individuals and their estate planners to shelter large portions of even the largest estates. Still, estate and gift taxes bring in over $1 billion annually, accounting for almost 2 percent of New York’s total tax revenue.
For Cuomo, this is apparently a grave injustice. He proposes increasing the estate tax exemption to $5.25 million and indexing future levels to inflation. (To my knowledge, he has not proposed indexing New York’s minimum wage to inflation, presumably because low-wage workers, unlike the scions of wealthy families, aren’t affected by inflation.) The proposed increase would bring the state in line with the federal exemption, which was permanently raised and indexed to inflation in 2012 when President Obama caved in to conservative lawmakers as part of the ‘fiscal cliff deal.’ Cuomo also proposes lowering the top estate tax rate from 16 percent to 10 percent, because someone who has just inherited more than $10 million couldn’t possibly be asked to give up that extra 6 percent.
The sole argument that Cuomo offers in favor of reducing estate taxes is that they drive wealthy individuals out of the state. The rich simply decamp to Florida when they retire, so the story goes, to avoid paying the tax (as if there were no other reason why elderly New Yorkers might relocate to a warm, sunny place dotted with golf courses and beaches). Cuomo is clearly channeling Michael Bloomberg, whose governing policy as mayor of New York was to “get every billionaire around the world to move here.”
It’s hard to know exactly what to say about wealthy individuals who abandon the state or country that made them rich just so their heirs can inherit their multimillion (or billion)-dollar estates without the nuisance of paying even a fraction of what ordinary workers pay on income they earn through hard work. “Good riddance” is one phrase that comes to mind. But the real question is how often this actually happens and weather it could possibly outweigh the massive revenue loss that Cuomo’s plan entails.
According to Forbes Magazine (no mouthpiece for the working class), Cuomo’s estate tax cut will cost New York $772 million per year when fully implemented. Since combined estate and gift taxes bring in just a little over $1 billion per year under current law, Cuomo is practically proposing to eliminate the tax. He touts this as a pro-growth strategy that will attract wealthy individuals to the state and keep them here, outcompeting other low-tax havens like Florida and Texas. This race to the bottom will ostensibly pay for itself and close the gaping hole in state revenue, once those wealthy retirees decide to take a pass on the warm weather, golf courses and beaches, and opt to live out their golden years in New York.
It’s a neat little theory. Unfortunately, it has almost no basis in fact. Multiple studies suggest that mass tax flight is a myth. Undoubtedly it happens sometimes, but media attention on high-profile tax scoffs like Phil Mickelson and Gerard Depardieu is highly misleading, obscuring the fact that the vast majority of individuals, including the wealthy, choose where to live and die based on factors other than the amount of taxes they pay. New York certainly has no trouble attracting the affluent, despite being a “tax capital.” NYC has more millionaires than any city in the country and boasts the most billionaires in the world. The state with the highest per capita population of millionaires, Maryland, has an estate tax rate identical to that of New York.
In other words, Mass Taxodus is a scary story told by the wealthy to convince themselves and the politicians in their pockets that cutting their taxes is good for society. This is especially true for the estate tax, since it is levied after a person has died and only marginally affects the amount that heirs receive. In any case, the burden is on Cuomo to show exactly how much revenue and economic activity is lost each year to the mythical estate tax beast. If he can’t, then he will be forced to fall back on timeworn conservative arguments against estate taxes in general. I have argued elsewhere that these arguments do not hold up to scrutiny.
Even if Cuomo could demonstrate that estate tax flight is real, there is an easy fix that doesn’t involve punching a massive hole in the state budget. Simply replace the estate tax, which taxes the entire estate before it is distributed, with an inheritance tax, which taxes heirs themselves. Lily Batchelder of the Brookings Institution makes a compelling case for making this change on the federal level, and it could easily be applied on the state level. While it’s conceivable that someone with a large estate would move to Florida just to avoid paying estate taxes, it’s unlikely that all of his/her heirs would do so. Something tells me that receiving just a little more of that $10 million inheritance wouldn’t be a compelling enough reason for the average trust-fund baby or middle-aged heir to sell the TriBeCa loft and buy a tacky pair of Bermuda shorts.