Do the Wealthy Flee Estate Taxes?
Some new calculations
State-level estate taxes probably raise revenue—but not much, and not always.
It is widely acknowledged that those subject to estate taxes take steps to reduce or avoid liability, including relocating to states without an estate tax in the years prior to their death. This, of course, deprives their former state of revenue under income and other taxes for the remainder of their lives, which represents a substantial offset to the revenue generated by the estate tax on those who remain.
While there’s existing literature addressing this question in much more sophisticated ways, one advantage of a Substack is that it provides the opportunity to explore questions through new lenses and to see if anything comes into view, even if the vision is a bit hazy.
We know which states federal estate tax collections come from. We also have details about federal income tax liability by state, broken down by income class. All else being equal, we would expect to see a reasonable state-by-state correspondence between (a) federal income tax liability for households with $1 million or more in adjusted gross income and (b) federal estate tax liability in those states.
We wouldn’t expect the ratios to be completely consistent across states, since the class of million-dollar-a-year earners is not coterminous with the class of people who will eventually owe federal estate taxes. Nevertheless, this is still a decent proxy that allows us to test whether high earners are fleeing to avoid estate taxes in their final years, which would show up in abnormally low ratios of federal estate tax liability to federal income tax liability for high earners in those states.
As you’ll see, this analysis comes with a lot of caveats and shortcomings, some of which could be addressed with a more rigorous study design and some of which are inherent in the data. That’s why I think Substack is the perfect place to explore this: we can look at some suggestive data that gives us directionally meaningful information, while acknowledging a lack of precision.
Even with the limitations, moreover, we get a couple of useful natural experiments: the 2001 Economic Growth Tax Relief and Reconciliation Act, which phased out a federal credit for state-level estate taxes between 2002 and 2006 (it fully offset liability prior to that), and the COVID-19 pandemic, which increased mortality in ways that presumably limited the ability to plan for estate tax avoidance.
An initial glance at the data is highly suggestive: there are consistently higher federal estate tax payments from states without their own estate taxes than we would expect based on federal income tax liability by state, which could be evidence of wealthy residents relocating in their final years to avoid state taxation of their estate.
The Tax Cuts and Jobs Act (TCJA) roughly doubled estate tax exemptions, which explains why—with a lag based on filing dates—estate tax collections fell so dramatically in the later years of this series.
Though not definitive, it is interesting that the lowest ratios between states with and without an estate tax are in 2020 and 2021. Predicting the timing of one’s death is always imprecise, but the pandemic resulted in substantial excess mortality. It took the lives of many people who might not have anticipated being in their final years and would not have been able to plan accordingly. We would therefore expect to see that state-level estate taxes had less of an effect on where people’s estates were taxed in those years—and indeed, that seems to be the case. (It is slightly surprising that this much of the effect shows up in 2020 itself, and other factors could be at play as well.)
There are many complicating factors. Especially in smaller states, the death of one billionaire can skew a single year’s collections dramatically, though we largely solve for this by aggregating state data. For small states where one or two payers are the predominant sources of federal estate tax revenue in a given year, IRS data is sometimes suppressed for privacy reasons, meaning that some states must be excluded from the analysis in certain years (excluding their income and estate tax revenue), which is another shortcoming. This data issue is greater post-TCJA, since the higher exemption means far fewer taxpayers.
Another issue: Delaware and New Jersey repealed estate taxes during the period in question. (New Jersey retained an inheritance tax.) Here, I took the conservative option of classifying them as non-estate tax states in all years subsequent to repeal, though we would expect some lag if people seek leave estate-taxing states several years prior to their passing. (In this instance, Delaware’s data are suppressed in some years anyway, so the issue is primarily about New Jersey.) We might also expect to see that, with the passing of years, states that repeal their estate taxes show a higher federal estate-tax-to-income-tax ratio after repeal, and we do. This is more gratifying than seeing the opposite result, but we can’t be terribly definitive based on a few years’ data, from a notoriously volatile tax, in a single state.
Then there’s a more fundamental question: if we’re measuring late-in-life tax responses, what is the driver: these states’ estate taxes, their overall tax burden, or both? Many of the states with estate taxes also feature above-average individual income taxes, which retirees—no longer attached to a place of work—might move to avoid. Retirees may also land in states without an estate tax for largely unrelated reasons, perhaps seeking sun and golfing more than a particular tax climate.
In a more sophisticated analysis, we could seek to control for these differences. For today’s simple tour through some basic data, I’ll just provide a baseline by comparing the states that currently have an estate tax to those that currently lack one, from both (1) 1997-2000, before any discussion or implementation of the federal reform that eliminated the credit for state estate taxes, and (2) 2015-2018, the four most recent successive years without significant exogenous factors (TCJA or pandemic effects).
Back when every state had a fully offset estate tax, the states that later repealed them had 38.7 percent higher federal estate tax collections as a percentage of federal income tax receipts from the highest-earning households. Now their collections are 70.3 percent higher. Something seems to have changed.
I could add many additional caveats, including the fact that $1 million in AGI in the late 1990s is not the same as $1 million in the late 2010s. If someday I choose to return to these data, I will investigate whether there are ways to firm up the calculations and isolate the effect. For now, I offer the figures as a potentially interesting observation, using this Substack as a scratchpad. Take it for what you will.
Certainly, the findings are in line with expectations.
A 2023 study by Enrico Moretti and Daniel Wilson concluded that 35 percent of local billionaires leave states with an estate tax, and that states lose 69 percent of estate tax revenue to reduced individual income tax collections. Recalculating just using states with individual income taxes, those states lose about 86 percent to reduced income tax collections, to say nothing of losses under other taxes. Some states, they find, actually lose revenue due to the estate tax, chiefly if they have high-rate income taxes.
Much earlier, Jon Bakija and Joel Slemrod explored the broader phenomenon of the rich fleeing high-tax states through the lens of federal estate tax returns. The period they analyzed was before the end of the federal credit, and with an eye toward that new reality. They calculated that if people moved five years before death in response to state estate taxes, the total revenue loss to the state would be 1.73 times as large as the revenue loss from the estate tax alone.
Both these papers offer far more scholarly insights into the question I sought to address here. But sometimes a simple look at the data can be instructive, too, despite the many limitations.
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