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As you may know, each week I have been writing about what I am calling the Nebraska Taxpayer’s Bill of Rights. The Nebraska Taxpayer’s Bill of Rights will be included in legislation I will introduce in January for the consumption tax. Last week I discussed what is wrong with property taxes. This week I will expose what is wrong with the inheritance tax.
The fourth right delineated in the Nebraska Taxpayer’s Bill of Rights states that “The State of Nebraska shall never impose or collect a tax on the inheritance of its deceased citizens.”
The inheritance tax is a form of double taxation. In Nebraska we already tax a person’s income and property, so taxing what a person passes down to his or her heirs adds another layer of taxation to what has already been taxed at least once before. How many times does the government need to tax a dollar?
There are only six states that still impose an inheritance tax on their deceased citizens and Nebraska is one of them. Among these six states, Nebraska’s inheritance tax ranks as the absolute worst in the nation! According to Kiplinger, Nebraska is the worst state in the union for retirees, and much of that ranking is due to our inheritance taxes. That is not a badge of honor we should be proud to wear.
There are some very good reasons why economists rank Nebraska’s inheritance tax as the worst in the nation. For instance, Nebraska’s inheritance tax applies to all property, including life insurance proceeds paid to the estate. Distant relatives qualify as a Class 3 beneficiaries and get taxed as a rate of 18 percent. The inheritance tax even applies to the transferring of any property to another person within three years of the death of the deceased person. How does one plan for that?
Nebraska’s inheritance tax gives wealthy people the right incentive to move. Nothing encourages people to move out of our state quite like our inheritance tax. Anyone wishing to pass down their nest egg to the next generation would do well to move to another state, such as Wyoming, which has no inheritance tax. Because the super wealthy know better than to retire in a state like Nebraska, the inheritance tax has primarily become a tax on the middle class of our state. Those who tend to get hit by the inheritance tax in Nebraska are those who cannot afford to move to another state.
Contrary to the popular opinion of those who advocate for the redistribution of wealth, the inheritance tax does not redistribute the assets of a wealthy person because that person is dead! Instead it punishes another person for acquiring that wealth. The inheritance tax does not punish a person for dying as much as it does their children for inheriting their wealth. As Milton Friedman once said about these kinds of taxes, they are “…much less taxes on being wealthy than on becoming wealthy.”
Because the inheritance tax punishes the acquiring of wealth, it is the enemy of upward mobility. The inheritance tax inhibits upward mobility for the next generation who may be struggling to pay down their mortgages, college loans, car loans or credit cards. For most heirs in Nebraska, inheritances give them the lift they need to finally pay down some of their indebtedness or finally repair the leaky roof.
The time has come for Nebraskans to reform its inheritance tax, and I say the best kind of reform we could possibly make is to abolish it altogether. Whereas, the inheritance tax is a double tax, which punishes the acquisition of wealth and inhibits upward mobility, the consumption tax is a single tax which encourages the acquisition of wealth and promotes upward mobility.