It is one of Connecticut’s not-so-fun factoids each year — the annual “Tax Freedom” day as declared annually by the Tax Foundation, estimating how many days after New Year’s it takes workers to accumulate earnings to pay their total tax bill for that year.
When it comes to death taxes there is a macabre proxy, measured not in days but in years — about three in Connecticut, by the same group’s estimate. Three years is the tipping point in the lifespan when, for any Nutmegger fleeing to Florida or another state with no inheritance taxes, Connecticut would stand to lose more from the loss of that individual and their accustomed spending habits than the state would have collected in death taxes upon his or her passing.
That tipping point is now on the move along the fulcrum of life in Connecticut. Last year, the state General Assembly and former Gov. Dannel P. Malloy set the state on a path by 2023 to align its estate taxes with that of the Internal Revenue Service, with the federal exemption set currently at $11.4 million.
Hanging in the balance? Sufficient tax income — at $225 million over 12 months through last June — for Connecticut to cover a decline in federal reimbursements to the state projected for the current fiscal year ending next June, as estimated separately by the Department of Revenue Services and the governor’s budget office.
Connecticut’s problem — which is the same for New York, Massachusetts and Rhode Island — has been the significant percentage of wealthy residents with the financial wherewithal to hop off that seesaw and declare formal residency in Florida where they already have a second home, or other warm-weather states free of estate taxes.
Last year, no fewer than 10 Connecticut General Assembly legislators filed bills to eliminate estate taxes, from all corners of the state — Sen. Heather Somers after getting re-elected by constituents in Groton, Stonington and towns north, and fellow Republican Sen. Dan Champagne in Tolland and the Quiet Corner; and on the other side of the aisle, new arrivals Rep. Steve Meskers in Greenwich and Sen. Will Haskell, representing the Westport area, with the latter not in line to collect Social Security for another four decades plus.
The bigger question now is whether, entering his second year in office, Gov. Ned Lamont will take up the issue where his predecessor left things. Connecticut’s estate taxes are borne by the rich — for the current calendar year, that means those with assets above the $3.6 million mark. Taxes are taken on marginal amounts above that threshold on a sliding scale, starting with a 7.8 percent tax on the first $500,000 — so $39,000 in taxes for a $4.1 million estate — and rising to a 12 percent tax on amounts beyond $10.1 million, with total collections from any single estate capped at $15 million.
It is obviously an issue as well, however, for anyone who believes in “progressive” tax policy under which those who make more shoulder more. But that notion must be balanced by the simple reality that estate taxes become everyone’s problem if they spur any kind of a trickle or larger migration south, as Lamont’s Greenwich neighbor, Sen. Meskers, points out. Meskers tells me he recognizes the need to be mindful of any shorter-term hit to a state budget that teeters annually on the edge of deficit.
“There’s a human equation involved — it’s an emotional issue,” Meskers says. “My overarching concern is that we balance the state’s needs (with) the needs of the residents, that tax policies do not drive people out of the state.
“The idea that people would leave and spend the last 20 years of their life with their economic activities outside the state is not good for anyone,” he adds. “I think Lamont is more than aware.”
Meskers’ legislation last winter was the lone bill to see a public hearing, with a Tax Foundation analyst offering during the session that tipping point at which the gains from the collection of the average estate are wiped out by the lost ripple effect of an individual who leaves.
“Of course, it raises money when someone dies, but … it drives some people out of a state,” testified Jared Walczak, director of state tax policy for the Tax Foundation. “If someone leaves five years before death because of the estate tax, in the average state you’re losing 171 percent of what you would have gained with the estate tax — three years is about the cutoff point.”
Starting in January, that estate tax exemption goes up to $5.1 million, and increases each year until it meets the federal limit in 2023. The Internal Revenue Service last broke out estimates in 2013 for the number of taxpayers with assets greater than $5.1 million, with Connecticut’s population numbering about 12,300 people. Of that number, 8,700 had socked away $5 million in their bank accounts and other financial investments alone, excluding the value of additional properties they own.
Given the $15 million collections cap, who shoulders the most as a percentage of their total assets subject to the state’s inheritance tax? That would be the estate valued at $129.5 million, with 12 percent of the taxable total ($119.4 million, carving out the $10.1 million exemption) added to the additional $663,000 surcharge to push up against the $15 million cap, with about $9,000 in wiggle room to spare. That amounts to 1.5 percent of the wealth of anyone with an estate worth $1 billion, with Connecticut having 11 billionaires as of 2018, according to Forbes.
It is not a topic the state’s wealthy residents are fond of discussing publicly, but one of Meskers’ Greenwich constituents who has made a small fortune in finance made clear that it remains a major sticking point there despite the ladder to 2023 that over time will exempt more residents from paying estate taxes.
The town’s residents paid up $765 million in personal income taxes to the state in 2017, according to the most recent town-by-town data from DRS, more than triple the combined contributions from Hartford, New Haven, Waterbury and New London.
“I think it’s been a huge issue for the state, and if a Democratic governor and a Democratic legislature is capable of eliminating the estate tax, I think it would be a miracle,” the Greenwich financier says. “I would be shocked if they were able to do it — but if they could, it would be one of the smartest things they could do for the state.”