Minnesota lawmakers poised to limit reach of estate tax

House Republicans
House Speaker Kurt Daudt, R-Crown, House Majority Leader Joyce Peppin, R-Rogers, House Property Tax & Local Government Chairman Steve Drazkowski, R-Mazeppa, House Taxes Committee Chairman Greg Davids, R-Preston, announced the House Republican Omnibus Tax bill, April 20, 2015.
Glen Stubbe | Star Tribune via AP

Minnesota lawmakers are considering a big reduction in the amount of taxes owed when wealthy people die.

In their $2 billion package of tax cuts, Republicans who control the Minnesota House would more than double the amount of money Minnesotans would have to amass before their estates are subject to taxes.

Under existing state policy, Minnesota's estate tax kicks in when an individual's wealth tops $1.4 million, an amount that is scheduled to increase to $2 million by 2018. The tax, levied at rates that range from 9 to 16 percent, currently affects less than 3 percent of estates in Minnesota.

The House tax bill would raise the threshold to $2 million this year. It also would make additional annual adjustments so that by 2018 the tax would only affect estates of $5 million or more. Future increases would be tied to inflation. Also in 2018, a flat rate of 16 percent would take effect.

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House Tax Chair Greg Davids, who describes Minnesota as an expensive place to die, supports raising Minnesota's estate tax exemption to match the federal tax code. Davids said he doesn't want people moving to other states to protect their assets.

"To me the estate tax is a very, very unfair tax," said Davids, R-Preston. "People have already paid taxes on this money. Now after they pass, the government comes and says, 'Okay you're dead, but we're going to get some more money from you.' That's just wrong. That's not Minnesota nice. A lot of states don't even have an estate tax."

Democrats are critical of most of Republican package of tax cuts. Some also say the estate tax change would cost too much to help a very small number of Minnesota families.

Davids said the changes in the House tax bill would benefit many farmers and small business owners, not just rich people.

"It affects maybe not that many Minnesotans," he said. "But if a farmer wants to keep his farm in the family, rather than having to sell half of it to give to the government, this is a very good provision."

The House is expected to vote on the bill next week.

Nonpartisan House researchers estimate that under the legislation fewer than 700 estates a year would have to pay to the tax. The current number is about 800.

The Minnesota Department of Revenue estimates the two-year cost of the estate tax exemption at nearly $172 million when fully implemented.

State Rep. Carly Melin, DFL-Hibbing, thinks that money could be better spent on schools and other government programs, rather than a tax break for so few people.

"Basically this is a huge tax cut for the wealthiest estates in Minnesota," Melin said. "Most people don't inherit a $5 million estate. Minnesota has one of the most progressive estate taxes, because we recognize that most people don't have that kind of wealth."

Some Democrats disagree.

"In my district, I have a lot of high income people," said state Rep. Ron Erhardt, DFL-Edina. "But that's not the point. The point is, do they have a lot of assets?"

Erhardt, who sponsored the original estate tax measure that was incorporated into the tax bill. State Sen. Melisa Franzen, DFL-Edina, sponsored a companion bill in the Senate.

The tax is an unnecessary burden, Erhardt said.

"People think they ought to be able to pass the whole world to the next generation, and if you do some estate planning you can do a lot of that," he said. "But when you have the estate tax here and somebody else doesn't and it's easy to move, some things you can't move. You can't move businesses that are manufacturing. You can't move farm land."

State Sen. Rod Skoe, chair of the Senate Tax Committee, said he has long wanted to improve the estate tax. But Skoe, DFL-Clearbrook, said he doesn't like the House approach of phasing in tax reductions over several years.

"My overall concern is that not only in their bill are they spending more than the surplus in tax reductions, they're passing those on into future years," he said. "So, the overall impact is twice or more of what the surplus is. While we understand the estate tax provision, the phasing in of it is problematic."

Skoe said he plans to unveil the Senate tax bill next week. He wouldn't say if it will include any estate tax provisions.

Gov. Mark Dayton is proposing only a minor technical change on estate taxes related to farm property involved in eminent domain that would cost the state $50,000 a year.