Spiking the Death-Tax Study

February 21, 2008

If the religion of Big Government in Connecticut has a sacred truth, it is this: Taxes don’t matter.

The Nutmeg State’s establishment insists that no matter how many new taxes the state imposes, and no matter how high the rates of existing taxes are hiked, individuals and businesses won’t change their behavior. The state’s tax burden -- already highest in the nation when all levels of government are measured -- can continue to rise, with no observable negative consequences.

So how do Connecticut’s elites react when a report by the state finds evidence that taxes might matter after all?

They yawn.

Earlier this month, a legislatively mandated study by the Connecticut Department of Revenue Services (DRS) drew some startling conclusions about the state’s death tax.

After examining economic trends in states with and without death taxes, documenting the data on residents who move to and from Connecticut, and surveying attorneys and accountants, the study concluded: “While policy makers must weigh a variety of factors in crafting tax policy, it appears that the data suggests [sic] that they cannot rule out that levying an estate tax may negatively impact the economic activity of their state and migration of their residents.”

That’s about as close as we’ll ever come to admission by Connecticut revenue bureaucrats that taxes matter. It’s a blockbuster finding, especially for a government agency that has an interest in keeping as many tax laws and regulations on the books as possible.

It would have been reasonable to assume that such a study would interest Connecticut’s capitol press corps.

But it didn’t.

Of the dozen or so reporters on the fiscal-policy beat in Hartford, exactly one -- Brian Lockhart of Southern Connecticut Newspapers, Inc., publisher of the Greenwich Time and the Stamford and Norwalk editions of The Advocate -- covered the study.

The fact that taxes change behavior -- documented countless times by economists and researchers over the past few decades -- simply doesn’t fit the narrative that dominates Connecticut’s non-debate over fiscal policy.

Back on Planet Earth, the damage done by taxing the value of what the dead leave behind is well known. The crushing burden of the federal death tax (in 1999, 55 percent on estates valued over $650,000) prompted Congress and President Bush to phase it out altogether by 2010.

While the elimination was hailed by pro-taxpayer advocates -- owners of family businesses in particular -- revenue-ravenous states faced the prospect of losing the portion of death-tax booty Washington allowed them to keep. And predictably, in short order many state governments, including Connecticut’s, adopted their own death taxes. The levy imposed by Governor Rell and legislators in 2005 taxes estates valued at $2 million or more at rates that rise from just over 5 percent to 16 percent.

Death-tax opponents warned that affluent -- and thus mobile -- Connecticut citizens would start to change their residency status as a means to avoid the tax. And they have.

According to the survey of estate-planning professionals included in the DRS study, over 52 percent have had clients change “their Connecticut domicile to another state primarily due to the Connecticut estate tax.” (According to one response: “I can tell you that the estate tax was the last straw for some; they moved their business and their family. These are younger folks not ready for retirement.”) The average size of these estates was $7.5 million, and average annual income of death-tax migrants was $446,000.

DRS statistics jibe with the survey results. In fiscal year 2006, the death tax failed to generate the revenue fiscal officials predicted it would. In fiscal 2007 the revenue raised lived up to predictions, but it’s on pace to fall well below estimates again in the current fiscal year -- a sure sign that residents are reacting to the tax. (And let’s not forget how much revenue from sales, income, and other taxes the state treasury loses when citizens skedaddle.)

There’s little wonder why over 20 states have resisted class warriors’ demands to impose their own death taxes. States such as Florida, Arizona, and California are gleefully drawing migrants from Connecticut and other tax hellholes. Most of these states had lower costs of living and lower tax burdens to begin with. Connecticut’s death tax gives Nutmeggers just one more reason to leave.

None of this, of course, means much to the politicians and activists who dwell in Connecticut’s fiscal la-la land, where taxes have no influence on residency and business decisions. They’re content with their ignorance -- as are their enablers in the media.

D. Dowd Muska is a writer, commentator and public-policy researcher. He can be reached at muskacolumn@cox.net.

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