OPINION: Want to grow Illinois? Abolish the Estate Tax

The Land of Lincoln distinguishes itself by being among the most unfriendly of the 50 states when it comes to taxes.  Illinois has been ranked numero uno as the state with the highest tax burden.

Death Taxes and Escaping Illinois

Just one of those unfriendly taxes is the estate or death tax.   The tax now applies to estates over $4 million with the tax rate on what’s taxed starting at roughly 28% and, oddly, works its way down for the very largest estates to around 14% on the taxable amount.  A farm or two and you are there!

No state – nada – adjoining Illinois has an estate tax and only Iowa and Kentucky have an inheritance tax.  An estate tax is on what a person has; an inheritance tax is on what a beneficiary gets.  Even then, the Iowa and Kentucky taxes don’t apply to spouses, children, grandchildren, and some others.  Iowa entirely phases out even its inheritance tax in 2025. 

The estate tax is one reason folks are leaving Illinois.  While Quincy calls, the estate tax says goodbye.  Many take the hint.  Local real estate transfers seem to confirm this with many saying good riddance to Illinois.  So do other studies including those of United Van Lines and U-Haul.

Impact on Income Taxes

The impact on state income tax revenues from the exit of residents in significant.  Believe me.

According to an Internal Revenue Service report there was a net loss of some 105,000 people in one recent year alone, taking with them some $10.9 billion – yes billion – in adjusted gross income.  At a 4.95% income tax rate, my calculator can hardly figure the loss in taxes to the state.  (OK, once I turned my iPhone sideways, it would make the calculation.  Let’s see.  $10,900,000,000 times 4.95% is $539,550,000). 

That’s real money!

And when people remain in Illinois, taxes on income are paid year after year after year.

Think Tank Proposes More Death Taxes

Despite the overarching tax burdens faced by Illinois residents, a think tank argues that the state’s estate tax should be increased.  Hard to believe, isn’t it?

The University of Illinois School of Labor & Employment Relations and Center for Tax and Budget Accountability are promoting just that.  They want the current $4 million exemption to be lowered to $1 million. 

The think tank reports that at the current exemption level the Illinois estate tax annually raises between $220 million to just under $400 million.  This, of course, is mostly property acquired with already taxed funds.  The report speculates that lowering the estate tax exemption from $4 million to $1, $1.5, or $2 million would increase the estate tax collections all told to just under $500 million to around $639 million.

Wait a minute!  The income tax on the income of those exiting Illinois might near $540 million.  And that’s every year!  Not just once when the taxpayer dies.  Does that make sense?

Those preparing the report apparently don’t see a connection between the Illinois estate tax and the outbound migration.  Because so many states have gotten rid of the estate tax, they presumably find it difficult to show a causal effect between avoiding taxes and moving.  The “empirical literature,” supposedly, doesn’t support the connection.  

Empirical?  

My empirical observation and experience from the border are that people are moving out of Illinois.   Just look around.  Talking with those relocating, we learn that estate taxes play a big part in the decision.  Even the think tank report acknowledges that the number of estates paying estate taxes in Illinois decreased from a peak of 5,100 in 2001 to just 860 in 2020.  The exemption increased over the years true enough.  But wonder why a continuing slide?

Sure, some will move out of Illinois for a variety of other reasons.  Many of us, though, love the Land of Lincoln and want to remain.  State government does little to encourage us to stay.   And we’d pay income taxes year after year after year if we stayed!

The University of Illinois School of Labor & Employment Relations and Center for Tax and Budget Accountability mean well no doubt.  The additional funds would be earmarked – to the extent the General Assembly can be trusted to earmark any revenue – for public services and programs.  No doubt, worthy of our support.  The report, though, is goal-oriented providing a new “raise taxes” option after the failed attempt to change the Illinois Constitution to allow a graduated income tax.  

The report fails to consider the consequences of the proposed reform of the estate tax.  The study should have involved more thoughtful research and less advocacy.

The income tax losses from people relocating out of Illinois?  The loss of volunteers dedicating time to benefit the needy?  The reduction in donations to local social service, charitable, and other needs?  The costs of administering an increased tax?   The loss of sales, employment, and other taxes?  The movement of business opportunities and jobs out of the state?  The reduction of our Congressional delegation because of lessening population?  The social, religious, and general impact of population loss?  And others?

I guess these and other consequences aren’t important enough to consider.

Do Politicians Care?  

The Wall Street Journal recently headlined an opinion piece “The Blue State Exodus Accelerates.” It highlighted the fact that Governor J.B. Pritzker shrugged off the accelerating taxpayer exodus from Illinois and other high-tax states.  In a recent press conference, he also remarked that we have other things to deal with.  

Illinois is losing income tax revenue.  As important, The Wall Street Journal candidly concluded that Illinois and like-minded high tax states “are losing human talent in droves.”  Communities have witnessed this as manufacturing facilities leave.  A study showed that the number of college-educated people who left the state increased by a third.

The Governor does point out that some companies are choosing Illinois as their home.  But then, he brushes off that in 2022 alone Citadel, Boeing, Caterpillar, FTX and Highland Ventures, among other businesses, are relocating.  

Let’s not forget, too, that some two-thirds of corporations operating within Illinois pay no income taxes to the state.  This critical observation is misplaced, in part, because corporations and businesses do pay billions in various taxes such as property, sales, utility and unemployment taxes, and more importantly create jobs, pay wages and salaries on which taxes are paid, provide employee benefits, patronize other businesses, and provide the economic fabric of the state.  The benefits from businesses, though, are people-driven and that requires we keep our people.

Frankly, I understand the Governor’s reluctance to push estate tax reform.  He and others in his family are among our wealthiest citizens.  Elimination of the estate tax would seem self-serving.  It wouldn’t be.  It would be in the best interests of the state.  (Don’t forget, Governor, one can always make donations to the state.)

It would be interesting for a reporter to seek a promise from the Governor that he and his wife WILL NOT move from Illinois after he leaves office and will pay the Illinois estate tax.  Former Governor Bruce Rauner who has a few bucks of his own now is a Floridian.  Add Billionaire Ken Griffin, at one time the state’s wealthiest resident, who now makes Palm Beach, his home.  And others.

State Senator Jil Tracy Pushes for Death Tax Elimination

State Senator Jil Tracy has introduced legislation to eliminate the Illinois estate tax. It’s to be seen if the Bill gets traction.  Farm, business, and professional groups, along with individuals, should be behind her efforts.  Doubtful, but let’s be hopeful.

The best for Illinois would be joining our neighbors and a total of 33 states and get rid of the estate tax.  Even modest reforms would help.

Why not let spouses share their $4 million exemptions without having to engage in fancy or complicated estate planning?  Even federal law allows this.

Why not let the $4 million exemption rise with inflation?  Federal law allows this.  Heck, even New York allows an inflationary increase, and its initial $4 million exemption now is $6.58 million.

Why not reduce the rate to the same as the individual income tax rate of 4.95%?  After a reasonable exemption, I doubt there would be much criticism of the estate tax at that level.

These things alone would make a big difference in motivating many folks to remain in Illinois and make our state more competitive.

Of course, we all have the option of moving across the border!

Think Tank Rethink?

My hope is that our politicians will rethink the estate tax.  The reform is long overdue.  Thanks to Senator Tracy for bringing the issue to the forefront.

Our best road to secure revenue and promote sound finances is population, jobs, and a robust economy.  Eliminating or reforming the estate tax would be an important step forward in rebuilding our state.

It wouldn’t hurt too for a think tank to do a rethink of its own.

Jim Rapp has been practicing law for nearly 50 years and has been published and speaks extensively on estate planning, business, education law, civil rights and other legal matters. He is a founding partner of Muddy River News LLC.