Eliminating Maine’s Estate Tax: Another Gift from Governor LePage to Wealthy Mainers

February 3, 2015

tax fairness

by Joel Johnson

The Governor’s plan to eliminate the state’s estate tax is bad for Maine, and the legislature should reject this proposal. It would hurt our ability to invest in a stronger economy for the state, and it would only benefit the wealthiest Maine estates and their heirs. It would further widen the growing gap between rich and poor in Maine and squander resources needed to educate kids, train workers, or offset growing property tax bills for low- and moderate-income families.

The estate tax is a tax on wealth flowing from deceased persons to their designated heirs. Only the wealthiest Mainers—those with a net worth of more than $2 million – pay the state’s estate tax. Of the more than 13,000 Mainers who die[1] each year in Maine, only 150[2] (about 1.3 percent) leave behind enough wealth to trigger the estate tax. The heirs of this small number of estates end up paying no more than 7.2% of the value of the estate.[3]

The Governor’s plan would be costly. It would reduce state revenue by $14 million in Fiscal Year 2017 (the state budget year that begins on July 1st, 2016) and by $71 million in revenue over the two-year budget period that begins on July 1st, 2017.[4] That’s more than enough to double property tax relief for low- and moderate-income Mainers. It’s more than enough to double Maine’s earned income tax credit and make it refundable, which helps build a ladder to the middle class for Maine’s low-income working families and reduces child poverty. That revenue could also go a long way toward lowering energy costs for Maine families and businesses by promoting investment in energy efficient heating systems and weatherization.

The estate tax helps make the state’s tax system fairer. Without an estate tax, Maine’s wealthiest families would pay zero state taxes on much of the money they inherit. Increases in the value of assets like stocks and real estate that are held until death would go untaxed.[5]

A popular yet misleading claim made by estate tax critics is that it hurts small businesses and family farms and forces their heirs to sell the family business to pay the estate tax bill. The reality is that very few small businesses or family farms are subject to the estate tax because very few are worth enough to trigger the tax. Small businesses and family farms are valued for estate tax purposes according to special valuation considerations and after taking account of both assets and liabilities. A 2005 report[6] by the Congressional Budget Office (CBO) looked closely at this issue. They used federal estate tax returns to estimate that only 135 small businesses and 123 farms nationwide would owe any federal estate tax if the federal estate rules were similar to Maine’s current rules.[7] Extrapolating those estimates to Maine suggests that only 3 farms and 3 small businesses owe any Maine estate tax in any given year, and virtually zero would face liquidity constraints to pay the tax. That is, barely any farms or small businesses would not have enough cash or other liquid assets available to pay any estate taxes owed.

It’s also clear that disparity in inherited wealth contributes to the growing income gap between the rich and everyone else, both in Maine and across the nation. The estate tax is one of the best tools for ensuring that all Maine children, regardless of how wealthy their parents or grandparents were, have the opportunity to thrive.

Low-income Mainers already pay a larger share of their income than wealthy Mainers,[8]and eliminating the estate tax would only make that worse. Governor LePage and the 125th Legislature cut Maine’s estate tax in half back in 2011, providing a windfall for about 600 estates[9] worth more than $1 million. Meanwhile, they cut property tax relief for low- and middle-income Mainers, failed to make critical investments in our public schools, and took away health coverage for tens of thousands of low-income Mainers.

The legislature should reject this proposal because it’s clear there are far better ways to spend more than $30-40 million per year than to give a tax break to a handful of Maine’s wealthiest estates. 


[1] US Census Bureau State Population Estimates

[2] Maine Revenue Services estimates

[3] Maine’s statutory marginal estate tax rates are 8% on value from $2,000,000to $5,000,000, 10% on value from $5,000,000 to $8,000,000 and 12% on value above $8,000,000. After accounting for the $2 million exclusion amount and the federal deduction for state estate taxes paid, the effective rate maxes out at 5.9%.

[4] Estate tax revenue varies randomly from year to year and is difficult to forecast. In the current fiscal year, which ends June 30, 2015, Maine estate tax revenue is expected to be $38 million. It’s forecast to be $29 million in FY 2016, $32 million in FY 2017, $34 million in FY 2018, and $37 million in FY 2019.

[5] Capital gains are subject to the income tax only when they are realized (when the asset is sold before death).

[6] http://www.cbo.gov/sites/default/files/07-06-estatetax.pdf

[7] See Table 8 in the CBO report.

[8]https://www1.maine.gov/legis/ofpr/taxation_committee/interim_schedule/MRS_Tax_Incidence_Study.pdf

[9] Maine Revenue Services estimates