Hello, Goodbye! Quincy’s Calling, but the Illinois Death Tax says goodbye

The Beatles song “Hello, Goodbye” is one of contradictions.  The City of Quincy and the State of Illinois, have their own contradiction.  Quincy says “Hello” and Illinois says “Goodbye!”

As the Beatles sing it:

You say goodbye and I say hello

Hello, hello

I don’t know why you say goodbye, I say hello

The “Quincy’s Calling” campaign touts the community as a place to work, live, relocate, and connect, which it certainly is. At the same time, Illinois sends folks packing by its refusal to abolish the state’s estate tax or as aptly described, the “death” tax.  Hello, Goodbye!  

Illinois Growth Challenged by its Estate Tax

It’s no secret.  Illinois continues to lose population.  U.S. Census Bureau information, as analyzed by Wirepoints, had nearly 114,000 folks leaving the state in 2021. Think of it: That’s nearly three Quincy’s, or two of all of Adams County.

Meanwhile, the University of Missouri Extension Service reports that the Show-Me state’s census remains steady, even modestly adding residents.

Recognizing Illinois’ vulnerability, another neighboring state, Indiana, has gained traction with a “Grass is Greener in Indiana” campaign, specifically aimed at enticing Illinois residents to become Hoosiers. 

There are many reasons Illinois’ population is declining, but chief among them is the Illinois estate tax.  It is the “death” tax; it should be abolished.

Most States Have Abolished the “Death” Tax

At one time most states had an estate or an inheritance tax. An estate tax is a tax on what you die owning – your estate.   An inheritance tax is a tax on what you give someone, the rate often taking in account one’s family relationship to you.  These taxes are in addition to any federal estate tax.

Federal tax law once allowed a deduction from – technically a credit against – the federal estate tax.  States, including Illinois, adopted this deduction as a state estate tax.  This deduction didn’t increase a decedent’s estate tax liability, it simply allowed states to share in what otherwise would have been paid as federal estate tax.  Made sense.

Federal law entirely ended the deduction in 2004, effectively ending the estate tax in most states.  Not happy with the change, Illinois required that the tax continue to be paid as if the deduction still applied.  It became an additional tax over and above the federal estate tax.  Trouble is that only a few states followed Illinois in keeping this death tax!   It no longer makes sense. 

According to The Tax Foundation, Arizona, Colorado, Florida, Texas, and our neighbor, Missouri, and most other states let the tax drop out of existence.  In fact, only 11 states still have the tax.  Another five have an inheritance tax.  One state – Maryland – has both.  

How much tax are we talking about?  The Illinois marginal “death” tax rate begins at roughly 28%.  This means that the tax on the first $1 million taxed is $285,714.00.  Oddly, the larger the estate, the lower the tax rate.  Whoever heard of that?  If $6 million is subject to tax, the rate drops to less than 16%, still a hefty rate.   Calculate the tax yourself using the Illinois Attorney General’s calculator. The tax is more than enough to prompt a move out of Illinois.  That’s happening.  Pack the bags! 

Taxes Prompt Out Migration

Illinois has been a big loser in the tax out migration.  

The Internal Revenue Service reportedly estimates that in a single year Illinois lost $6 billion in the income of its residents. Importantly, the “death” tax, if paid at all, is paid but once at one’s death.  An income tax garners tax revenue year after year after year and increases with one’s prosperity.  

There also are sales and other taxes those living in Illinois pay, along with providing a general boost to local economies.   A recent study found that merely having the Quincy Regional Airport has a $24.7 million annual economic impact for the area in employment and spending. This is but one example of the significant impact of just having “people.”  There are others ranging from patronizing restaurants,  utilizing business services, obtaining health care, shopping, attending area events such as those in Quincy and Hannibal, supporting the arts, and just day-to-day living in the community, among many others.  The loss of the “death” tax would be more than made up by the impact of folks deciding to remain in Illinois.

Those affected by the Illinois “death” tax are not always the coupon clipping retirees one might imagine.  More often they are the small business owners, entrepreneurs, farmers, and others who provide the real infrastructure and job creation of our state’s economy who relocate to escape the Illinois “death” tax.  They are very often the social, political, and civic leaders of our communities.  They, too, are the supporters of local charitable organizations.  They benefit a community in many ways.  

What’s important to recognize is that those who may be subject to the Illinois estate tax are the ones who have a choice whether to make the state their legal residence or move to a death-tax-free state.  Illinois shouldn’t encourage them to move and that’s exactly what the “death” tax does.  Estate and financial planners, sadly, often are compelled to point out that the greatest tax savings a client might achieve would result from leaving Illinois!

The current Illinois estate tax exemption is $4 million.  This, certainly, is not an insignificant amount.   But consider that based on a recent farm real estate sale in Adams County that would amount to a farm of only around 200 acres, hardly what is needed to support a family farm operation.  The average farm size in Illinois is 375 acres, though many are much larger. Add the value of machinery and equipment to operate the farm and, for some, a cattle or livestock operation.  Have you priced a combine or tractor lately?  Also consider the many moderate size family or closely owned manufacturing, service, and other businesses.  

Our area depends on the farm and business economies for jobs and much more.  Liquidating or mortgaging a farm or business to pay “death” taxes isn’t a sound option for Illinois.  

Abolish or Reform the Tax 

Having a modest estate tax rate in Illinois – perhaps the same rate as for income taxes after a decent exemption – might make some sense.  Better to dump it, though, and join most states in dropping the tax.

Even if it’s not abolished, it’s time for the General Assembly to reform the tax.  

One welcomed change would be to allow “portability” as is allowed under federal law.  “Portability” permits spouses to combine their exemptions without elaborate estate tax planning.  With “portability” spouses could then combine their $4 million exemptions, allowing $8 million to be transferred on the death of the survivor.  

The General Assembly might also increase the exemption every year by the rate of inflation as does the federal government.  Heck, even New York, which continues an estate tax, annually increases the exemption and is now over $6.1 million.

The last time the General Assembly provided estate tax relief was a cozy political trade off to entice Sears Holdings Corporation to remain in Illinois.  Sears was provided some $15 million in tax credits and another $125 million by extending a special taxing district, all after $250 million in incentives 20 years earlier.  Where’s the company now?  Sears went into bankruptcy in 2018 and in some form or other apparently limps along. Need we be reminded that there’s no longer a Sears or affiliated Kmart contributing to our community? 

Wouldn’t it be preferable to incentivize our citizens to remain in Illinois and help our community grow by ending the “death” tax?  

Let’s not forget that Missouri residents, particularly in the Muddy River News readership area, support our Illinois communities.  We shouldn’t be upset, then, for those wishing to move nearby to Missouri.  However, according to United Van Lines, Illinois residents are more likely to move to Florida, Texas, California, Arizona, Washington, and North Carolina – not Missouri. These moves don’t benefit Illinois or Missouri!

Renewed Call to Action 

It’s rather surprising that farm, business, and other groups, as well as local community and political leaders, aren’t making the Illinois “death” tax a bigger issue.  While the “Quincy’s Calling,” effort is welcomed and hopefully meets with success, maybe more focus should be on keeping the folks we have.  Or have we accepted that many already plan to say goodbye to Illinois?

Perhaps we have found that the General Assembly is deaf to calls for reform.  So far, that’s been the case.  Although leadership has changed, little else apparently has. It should.

Before there’s the Beatles final “Hello, Goodbye,” maybe renewed calls to the General Assembly to abolish the “death” tax are warranted.  Farm, business, political, and community leaders should demand a General Assembly vote to end the “death” tax!  It likely would and should pass.  

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.