Maryland has the most millionaires per capita (170,000, or 7.7 percent of households), but those families who make their money here don't stay here
Although Florida has 31 percent fewer millionaires living in the state (per capita) than Maryland, there are 94 percent more millionaires dying there. Closer to home, Virginia has 13 percent fewer living millionaires than we do, but it has 13 percent more dying millionaires.
One reason that might explain the discrepancy: Maryland has the highest estate and inheritance taxes in the country.
For the first time in many years, the Maryland legislature is rallying behind a proposal to decrease taxes. In this case, two Senate bills propose increasing the Maryland estate tax exemption amount from $1 million to match the federal limitations — currently $5.35 million. One bill would enact this plan immediately, and the other would phase in the benefits over five years. In either case, this is a positive step for Maryland to compete in the state marketplace, although I would prefer an immediate fix, to solve a growing problem.
People do make choices based on estate taxes (they make choices based on income taxes too, but that is a topic for another day). My colleagues and I have had countless clients investigate moving out of state for tax reasons. Many of them ultimately do so. When they leave, they stop paying income taxes and sales taxes here; they hire fewer workers and even move their company headquarters. Additional taxes that reduce state revenue should upset both Republicans and Democrats.
The individuals with the most to lose from an additional Maryland estate tax are older and wealthier (i.e., retired and semi-retired wealthy individuals). They also have the most portability and frequently own second homes in low tax states. These clients are worth millions of dollars, and some have a net worth in the tens of millions or hundreds of millions.
The Maryland estate tax regime creates excessive taxes for them and causes costly administrative burdens for many families and small business owners. Moreover, technology has allowed individuals to change residency with little impact on their work life. As portable devices and technological advances allow for a mobile workforce, the same tools allow for mobile management of a workforce. Many wealthy business owners spend half their time in Florida or similar jurisdictions. They work from home, and spend as much time in Maryland as needed, as long as it is less than 180 days per year.
Maryland has consistently ranked as one of the highest tax states in the country. As a result, many wealthy Marylanders sought residence elsewhere. The Sun has previously written that millionaires are fleeing the state, and that wealthy Marylanders are "bugging out because of Maryland's estate tax."
For those residents who cannot easily move, but who are still subject to the estate tax, the administrative and regulatory burdens are quite costly. For example, a small business owner with an estate of approximately $2 million is required to file a Maryland estate tax return but not a federal estate tax return. If this individual owns two homes, a small business that is being left to the family and a small art collection, the appraisal costs alone could be tens of thousands of dollars, while the attorneys and accounting fees required for probate, tax returns and related costs could equal another $50,000. After paying the tax, the costs of complying with Maryland law could be nearly $100,000. In other words, taxpayers will need to spend more to comply with the tax law than the tax itself on these amounts.
I recently wrote a research article documenting the history of the estate tax in Maryland, which outlined the state's high tax approach dating back to the 1800s. I concluded that article by suggesting that Maryland will not reform its estate tax regime, stating that "unfortunately, if the past decade reflects on future actions, the choice they make will be the wrong one." I certainly I hope I was rash in making that assumption. Maryland legislators have a choice. They can adopt the proposed legislation, or drive our millionaires to Florida, Virginia, or elsewhere.
David Rosen is a CPA and tax attorney for RS&F (Rosen, Sapperstein & Friedlander) based in Owings Mills. David can be reached at email@example.com.To respond to this commentary, send an email to firstname.lastname@example.org. Please include your name and contact information.