The Governor has proposed eliminating the unified gift and estate tax as part of her package of proposed budget changes to balance the State Fiscal Year (SFY) 2010-2011 budgets. This repeal not only would reduce state revenues by $85 million in SFY 10 and by $177 million in SFY 11, it also would make our state tax code more regressive as this tax falls exclusively on the state’s wealthiest residents. At a time of unprecedented state budget deficits and demand for state assistance from residents adversely affected by the worst economic downturn in decades, Connecticut simply cannot afford to forgo this important source of revenues.
The budget bill proposed August 31, 2009 by the Democrats (HB 6802) would maintain the tax, but increase the threshold for the value of the estate and/or gift subject to the tax to $3.5 million or more (instead of the current $2 million), reduce the marginal tax rates on estates and gifts valued between $3.5 million and $10.1 million in the aggregate by 25%, and eliminate the tax “cliff” in current law, but in a manner that reduces state revenues more than necessary.
Very few households are subject to Connecticut’s unified gift and estate tax, which is only levied on taxable gifts and estates that exceed $2 million. On average, only about 1 percent of the Connecticut residents who die each year are wealthy enough to be subject to this tax. The estate tax makes Connecticut’s tax system more equitable, since Connecticut’s current tax system requires low-and middle-income taxpayers to pay a greater percentage of their income in state and local taxes than Connecticut’s wealthiest residents pay. Because Connecticut’s unified gift and estate tax is levied only on taxable estates greater than $2 million, it helps to address this inequity; repeal would exacerbate it.
Arguments for repeal of the estate tax are not based on strong evidence. The estate tax has been criticized for encouraging older Connecticut residents to move out of state, but rigorous research does not support this position. In lieu of repeal, Connecticut’s estate tax should be repaired to eliminate its “cliff.” Under current law, an estate of $2 million pays no Connecticut estate tax while an estate of $2,000,001 pays $101,700. Repair, not repeal, of the unified gift and estate tax is the far better choice.