Rep. Ann Lenczewski, the tax committee chair, said on The Daily Circuit that the new gift tax might affect 1,000-2,000 people per year. And the expansion of the estate tax will prevent extremely wealthy people from sheltering their money from taxes by giving it away shortly before they die.
"Carl Pohlad gave away about $3 billion of wealth right before he died," Lenczewski said, referring to the business magnate and Twins owner who passed away in early 2009. A so-called clawback provision would now include such gifts in the value of the benefactor's estate.
"I think that's really a fairness issue for the folks who die knowing they're going to die, and the unplanned deaths," Lenczewski said. "So if you get hit by a truck and die tomorrow and you haven't gifted away your wealth, you're at a disadvantage [compared to] somebody who knows they have a terminal illness. You don't want to see two people, who are subjected to tax, paying different amounts for different reasons." The clawback tax levels the playing field, she said.
Lenczewski called the estate tax "the most progressive tax we have in Minnesota. It's far more progressive than the income tax. ... This is absolutely the best way to have the wealthiest pay more."
The gift tax, she emphasized, has a lifetime exemption so large that most Minnesotans will be unaffected.
"Let's take myself and my husband," she said. "We have four kids. I can give each of my four kids $14,000 a year, and my husband can too. We don't pay any tax on that. But if I give each of my four kids $15,000, and my husband does too, we've picked up a thousand bucks per head on each kid for each of us. So now we've got $8,000 of our $120,000 we've gifted to our children that we'll have to pay some tax on — when we hit a million. So even that first $8,000 doesn't count.
"So you can guess now we're talking about very, very wealthy people. Most people can't imagine they could give away $120,000 a year, year in and year out, and not pay tax until they hit a million dollars of liability in a lifetime. ... It's about 1 to 2 percent of Minnesotans who might be affected by the gift tax. We're not sure yet. It's projected about 2,000 filers will file, although even those people don't all pay it once they file. We have 5 million people in Minnesota. We're looking at one to two thousand people who are going to be affected."
King Banaian, an economic professor and former state legislator, pointed out that a tax that affects even a relatively few people can still give those people "pretty strong incentives to consider looking at other states."
"The desire to build up your business is in part in the shadow of a motive to leave something for your heirs," Banaian said. "If we tax away some of that benefit, to leave it to your heirs, the incentive for you to build your business is reduced."
Lenczewski said the best data available suggests that Minnesota's taxes play either no role or a small role when people decide to move to other states. Banaian countered that the true impact of the taxes may be harder to measure.
"Which investments don't get made because of the climate here?" he asked. "It's easy to measure people when they move. It's much more difficult to measure the investment that doesn't happen. ... You can gather data on migration, but the real story is going on in that which is not seen, that investment which doesn't occur because that person says, you know what? I'm going to take the next business and move it someplace else."
The Wall Street Journal wrote that Minnesota deserved "the grand prize for self-abuse," adding:
"The new [gift tax] is all the more punitive because it applies the 16 percent estate tax ... to any gift within three years of death. This is essentially a clawback tax, or more taxation without respiration. Democratic Governor Mark Dayton, who signed the law, is the heir to a department store fortune and knows a lot about inheriting wealth but not much about creating it."