Mainers experience dramatic economic inequality. Between 1973 and 2015, the top 1% of Maine families captured 42% of all income growth, leaving just 57% for the remaining 99% of Mainers. That income inequality is correlated with inequality in wealth.[i]
It’s important to be clear about what we mean by “wealth.” While income is money coming into a family, wealth is a family’s assets — things like savings, real estate, and businesses — minus debt. Both are important sides of families’ financial security, but wealth cushions families against emergencies and gives them the means to move up the economic ladder.
Wealth inequality is 10 times more concentrated than income inequality. Wealth for the poorest 10% of Americans has actually declined over the past 50 years. Racial disparities in wealth today are as stark as they were in 1963, with white family wealth seven times greater than black family wealth and five times greater than that of Hispanic families.
If our economy were a level playing field, all Mainers would have equal access to the foundations of success. Instead, income and wealth inequality play a role in determining whether we can access the foundations necessary for economic security, let alone wealth, such as high-quality education, health care, and good-paying jobs.
A robust estate tax reduces inequality
Our state’s bloated estate tax exemption perpetuates and increases inequality.
The loophole for millionaire and multimillionaire estates in Maine is more than five times larger today than it was in 2011. Currently, Maine’s estate tax applies only to estates worth more than $5.6 million for individuals, or $11.2 million for the joint estates of married couples. Maine’s Legislature is considering a bill, LD 518, that would bring Maine’s estate tax back to its 2011 level, to apply to all individual estates valued at more than $1 million and married estates worth more than $2 million. Even at this exemption level, only about 750 estates would pay any tax. Many of those estates are held by residents of other states.[ii]
Restoring the estate tax to its historic level would generate roughly $30 million in state revenue annually. That’s money that could be invested in education, health care, and infrastructure — strengthening those pillars of our economy and helping to ensure hard work is rewarded by economic mobility.
The truth of the matter is that most Mainers are lucky to earn $2 million dollars over an entire lifetime, let alone have a million dollars in assets to pass on in their estate.[iii] Inequality grows when our tax system is tilted in favor of the wealthiest, as it was when Maine cut its estate tax in 2011 and 2013. That inequality harms economic growth.
By reducing inequality, fixing the estate tax would boost the economy
Our economy suffers from declines in labor productivity and consumer demand when access to education, health care, and capital becomes limited due to inequality.
At the same time, concentrated wealth typically yields unbalanced political power, leading to policy choices that favor the wealthy at the expense of investments that support economic mobility and reduce poverty. The Organization for Economic Co-operation and Development recommends increased access to education and higher taxes on the wealthy to reverse the loss of economic growth that stems from inequality. A more robust estate tax is part of the solution.
Fixing our estate tax will make our tax code more fair
The estate tax isn’t just a valuable tool in reducing inequality and securing the resources necessary for shared prosperity. It also helps prevent the very wealthy from avoiding taxes on certain forms of wealth.
Much of a wealthy estate’s value comes from unrealized capital gains — growth in the value of assets such as real estate or stocks. The Center on Budget and Policy Priorities estimates that, on average, unrealized capital gains compose between 32% and 55% of estates worth more than $5 million.
Capital gains are taxed when assets are sold. But without a robust estate tax, there is no tax on capital gains when they are inherited as part of an estate.
The ability of the heirs of very large estates to see their wealth grow dramatically without paying taxes is one reason why our tax code is so out of balance. Putting Maine’s estate tax back at 2011 levels would help level the playing field. It would also help generate additional revenue from non-residents.
The Legislature should enact LD 518. A more robust estate tax will improve economic opportunity, helping to fund higher quality schools and infrastructure that we know are essential to cultivating growth and opportunity in our economy.
[i] Sommeillier, Estelle, and Mark Price. 2018. The New Gilded Age: Income Inequality in the U.S. by State, Metropolitan Area, and County. Economic Policy Institute, July 2018.
[ii] Data from Maine Revenue Services shows that about 150 estates owed any estate tax when the exemption was $2 million, and MRS provided estimates to the 125th Legislature showing that increasing the exemption from $1 million to $2 million benefited about 600 more estates. Under a $1 million exemption, about 750 estates would owe any tax each year with anywhere from 40 to 50 percent of these estate being held by residents of other states.
[iii] According to the Social Security Administration, the expected lifetime earnings of a woman at any education level is less than $2 million dollars and the expected lifetime earnings of men only exceeds $2 million for those with a bachelor’s degree.