State likely to repeal inheritance tax

Few would benefit because most estates too small to be levied

February 01, 2000|By GADY A. EPSTEIN | GADY A. EPSTEIN,SUN STAFF

Maryland appears poised to join a growing number of states doing away with their inheritance taxes, but most people won't notice the difference.

The tax is unpopular -- even in death, the government gets its take -- but the majority of estates are too small for it to apply.

Because of a quirk in the state tax code, most of Maryland's biggest inheritors won't save a dime if the tax is repealed.

Those who stand to benefit from the $50 million tax cut are siblings, distant relatives and nonrelatives.

They make up about a fifth of the people who pay the inheritance tax, but they pay nearly 70 percent of the total collected.

Regardless of how many will benefit, the momentum is so strong for doing away with the tax that it's considered almost an inevitability in the General Assembly. Forty-one of 47 senators have endorsed a full repeal, House Speaker Casper R. Taylor Jr. has made the issue one of his priorities and Gov. Parris N. Glendening is on board.

"We're going to abolish it," said Taylor, an Allegany County Democrat who believes legislators will vote this year to phase out the tax.

"Two years from now, there will be no inheritance tax in the state of Maryland," Taylor said.

The people who pay the tax are the heirs to Maryland residents with estates of more than $20,000, which made up less than half of the 26,000 estates opened last year.

Spouses pay 0.9 percent after significant exemptions. Children, parents and other direct lineal heirs also pay 0.9 percent. Siblings pay 8 percent this year, 5 percent after July 2001.

All other relatives and nonrelatives pay the top rate of 10 percent.

Nationally, the trend has been to repeal state inheritance taxes. Today, 13 states have an inheritance tax like Maryland's, down from 33 states two decades ago.

Popular and affordable

Economists say the reasons are simple: It's popular to get rid of a tax that affects spouses and children, and most states can afford to wipe it out, especially when they have extra cash as Maryland does with a $1 billion surplus.

"Politicians can say, `We abolished a tax.' And sure, it costs them something and it does affect government services, but there are not many taxes they can abolish," said Mike Ettlinger, tax policy director for Citizens for Tax Justice, a progressive research center that generally favors death taxes.

"They can't abolish the state sales tax, for instance, so I think it's a good headline for them," he said.

`Punishing people'

It's a headline that Dorothy Lucas is waiting to read.

The 92-year-old resident of Leisure World has tacked a note on her desk reminding her to stay alive until the tax for her brother goes down to 5 percent in July 2001.

"I have a brother who's almost as old as I am, and he shouldn't have to pay 10 percent of what I have left," Lucas said. "This is not human in any sense. It's punishing people who do not have children."

With an estimated estate-to-be of $300,000, Lucas' brother, nieces and nephews could together save up to $30,000 from a repeal of the tax.

Fred Franke, an Annapolis estates and trust lawyer, said elderly sibling inheritances are among the most troubling he handles.

"It can be horrible," Franke said. "I have had clients -- elderly siblings, brothers and sisters -- who are just looking out for each other at the end of their lives, and it's enormously difficult."

But that's a fraction of inheritance tax cases. As few as one in nine people who pay are siblings, though they pay almost a quarter of the total taxes, according to estimates based on a sample of 1999 collections.

Other supposed victims of the tax wouldn't benefit much from its repeal.

Jeannine Mizell and her brothers inherited the 79-year-old family business, Mizell Lumber and Hardware Co. in Kensington, from their mother when she died in 1990.

Taxes on the inheritance totaled more than $300,000, and the Mizells didn't have the cash to pay all at once.

"At this point, 10 years after her death, we still owe $70,000 in federal estate tax," Mizell said. "The money we spent would send my children to college."

Supporters of a tax repeal highlight Mizell's case because they are eager to demonstrate that Maryland's inheritance tax hurts businesses.

Anti-tax crusaders steered her to a Washington newspaper, which detailed her plight in a story in the fall.

But here's how much money Mizell would have saved without the state inheritance tax: $0.

Mizell's problem was the federal estate tax -- which hits estates over $675,000 with a levy ranging from 37 percent to 55 percent -- and a second Maryland death tax that hits anyone who pays the federal estate tax.

The family's federal estate tax bill was $297,000, after tax credits. The Mizells owed $30,000 more in state inheritance and estate taxes, but that's where a quirk in tax law occurs: People would pay more in Maryland's other death tax if they didn't pay the inheritance tax, so getting rid of the inheritance tax wouldn't make a difference for many large estates.

`It's sort of a stretch'

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