Illinois is one of few states with ‘Death Tax.’ Bill would make it highest in U.S.

Illinois is one of few states with ‘Death Tax.’ Bill would make it highest in U.S.

Increasing the estate tax would hurt family farms and businesses, drive wealth and investment out of Illinois. Most states are ending their ‘death taxes.’

Many states have moved away from taxing assets after people die because of the harm to family businesses and farms, but a new proposal before state lawmakers would boost Illinois’ estate tax 5 percentage points across the board, giving Illinois the nation’s highest top rate.

House Bill 3920 would hike the existing state tax on estates of over $4 million to 9.95% from 4.95%. Unlike neighboring Wisconsin, Michigan, Indiana and Missouri, Illinois is one of just a dozen states that still have an estate or inheritance tax. Tax Foundation analyst Katherine Loughead noted, “The top marginal estate tax rate under this proposal would become the highest in the country at 21%.”

While the bill’s sponsors intend the extra revenues to be used to support Illinoisans with disabilities, hiking the estate tax would squeeze family farmers, reduce the accumulation of productive assets, encourage spendthrift behavior, fuel tax avoidance and evasion, and drive wealth to other states.

Increasing the estate tax would harm all Illinoisans, not just Illinois’ wealthiest families

When someone dies, the federal government taxes the estate by up to 40%. Then Illinois piles onto that with more taxes of up to 16%.

The Tax Foundation notes the harm of estate taxes: “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.”

Research shows higher estate tax rates increase efforts to avoid those taxes and reduce wealth accumulation. People employ more complex estate planning techniques that carry economic costs.

By reducing savings that finance new investments, the estate tax reduces the payoff to working.  Estate and inheritance taxes also discourage entrepreneurship, discourage business expansion and encourage early retirement.  This means fewer jobs and lower wages for all Illinoisans.

Estate taxes can also threaten family farms, with combined federal and state tax rates potentially exceeding 50% of the land’s value. Farms tend to be asset rich and cash poor, forcing families to sell assets to make estate tax payments.

Research from the American Farm Bureau Federation showed that at current farmland prices in the Corn Belt, an exemption level of $3.5 million would mean Illinois farms of 473 acres would be hit with an estate tax, or 31% of Illinois farms. An exemption level of $5.8 million would end up hitting Illinois farms with 784 acres, or 21% of Illinois farms.

This means that at Illinois’ $4 million exemption level, a significant number of farming operations could be subject to this tax. Given that family farms dominate the state, with more than 94% of farms family-owned, the hike in the estate tax would make it more difficult for many families to pass their farms from one generation to the next.

Increasing the estate tax would exacerbate Illinois’ exodus

Increasing the estate tax would also aggravate the Illinois exodus. In 2020, the state saw a seventh consecutive year of population loss and its worst single-year loss since World War II. Illinois lost more than 253,000 residents during the past decade, more than triple any other state.

Illinois is continually ranked as a prime place to abandon by moving companies. A 2016 poll by the Paul Simon Public Policy Institute showed high taxes are the top reason Illinoisans give for wanting to leave the state.

Boosting the estate tax would likely encourage wealthy Illinoisans to move and could push more retirees out of the state. Research shows estate and inheritance taxes have a large impact on the location decisions for those at the top of the income distribution.

When people leave a state, they take more than just their incomes or assets with them. Businesses take jobs to other states. Losing residents and workers means lower consumer spending resulting in less tax revenue. Policies that erode the tax base are counterproductive because they undermine the state’s long-term fiscal future.

The costs associated with estate and inheritance taxes are the reasons most states have moved away from them. Illinois is one of only 12 states to still impose an estate tax. Six other states impose an inheritance tax on assets transferred from a deceased person’s estate.

Illinoisans already shoulder a heavy tax burden, with the second-highest property taxes in the country and the highest state and local tax burden in the nation. Increasing the estate tax would make Illinois worse off when the state economy can least afford it.

Lawmakers should instead focus on fixing the fiscal issues plaguing the state, such as ballooning pension debt and chronic deficits. Those moves, outlined in Illinois Forward 2022, would make Illinois a place where people want to live, work, play and stay.

Editor’s note: An earlier version of this article incorrectly noted the amount by which Illinois’ estate tax would be raised. The bill, which will not progress this legislative session, called for 5 percentage points across the board.

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