Md. seniors get another reason to move away

May 19, 2004|By JAY HANCOCK

DYING mildly wealthy in Maryland is getting more expensive.

This year's General Assembly rejected President Bush's assault on the death tax, widening the gap between federal and state tax policy and creating new incentives for well-off seniors to decamp to Florida.

A million dollars and change, including home value, is not an overly large pile to expect to transfer unmolested to your heirs after a lifetime of toil.

The federal government agrees, and then some. This year the Internal Revenue Service gives a free death-tax pass to estates worth up to $1.5 million. The exemption rises to $2 million in 2006 and to $3.5 million in 2009.

But not in Maryland and other states that have seceded from some aspects of federal tax policy. Here, if the governor signs the bill as expected, any nest egg worth more than $1 million will be tapped at marginal rates of up to 16 percent by Comptroller William Donald Schaefer. It's part of a growing, little-examined divergence between federal and state taxation that is spawning headaches for taxpayers, new government bureaucracy and, in some cases, dumb tax law.

"We're also hearing from clients, `Well, I'm not going to live in Maryland anymore,' " says John P. Edgar, an estate lawyer at Venable LLP in Baltimore.

Of course they're hearing that. Maryland oldsters have been emigrating to tax havens for years. More than 7,600 over-65 Marylanders moved to Florida (no state income tax) from 1995 to 2000, according to the Maryland Department of Planing. Maryland would have 60,000 more retirees if its portion of seniors were the same as the nation's.

It's a shame, because well-off seniors contribute far more in state revenues than they consume in costs. They don't have kids to infest the schools. They don't commit crimes. They do have private or federal health insurance.

Now Maryland gives them another reason to vamoose .

We could argue about the scope and design of Bush's death-tax cut. No estate, however Gatesian, Trumpish or Buffettlike, will be taxed at the federal level in 2010, which is a bit liberal! The exemption shrinks back to $1 million in 2011, although many expect Congress to eventually extend death-tax relief to 2011 and beyond.

But the practical effects are confusion for taxpayers and demerits for Maryland in the interstate tax game. The state had already partly "decoupled" from Bush's 2001 estate-tax cut; now, if Gov. Robert L. Ehrlich Jr. signs the bill just passed, the link will be severed.

The result: a hoard of $1.5 million, exempt from death taxes in Florida, Pennsylvania and other states guided by federal rules, would be taxed $64,000 by Maryland, says Venable's Edgar. This is a wonderful state, but $64,000 is a powerful incentive to get the heck out.

The change is part of a larger divergence between state and federal taxes prompted by big cuts in Washington on one side and states' desire for revenue on the other.

For years, in most places, federal and state tax bases have been similar. States and Feds would change tax rates from time to time, but the computation of what was taxed was more or less the same and had to be done only once.

So Maryland's personal income tax was based on the federal Form 1040. State and federal depreciation schedules were the same. State death taxes were based on federal guidelines.

Now that's changing, and not just for estate taxes. Bush and Congress have cut corporate taxes by accelerating depreciation rates; Maryland and many other states have stuck with the old ones. Washington cut taxes for dividends; Annapolis didn't.

And nobody's happy.

State and federal tax laws "are growing further and further apart, in general," says Maryland Deputy Comptroller Stephen M. Cordi. "I think everybody would agree this is not a good situation. It just complicates administration. It complicates compliance."

The state must hire four new employees to staff what would essentially be a separate Maryland death-tax bureau, legislative analysts estimate. Because many states are rejecting federal depreciation schedules, corporate tax departments are working overtime, too.

"You have to keep different books for each state," says Joseph Crosby, legislative director for the Council on State Taxation, a big-business lobby. "It's a huge hassle for the companies that do it, but it's also more difficult for the states on audit."

Businesses blame the states. States blame the Feds. Some think state taxes are too high; others call federal taxes too low. But everybody can agree that even more complicated public revenue laws waste resources and enrich nobody.

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