Legislative Testimony LB881, Exempt Life Insurance Proceeds from Inheritance Tax

Good afternoon, Chairman Smith and members of the Revenue Committee.  My name is Sarah Curry, and I am the Policy Director for the Platte Institute.  Thank you, Senator Schumacher, for introducing LB881.  I am here today to testify in support of this bill.

My grandmother is 90 years old and was just recently hospitalized for an illness.  My family started discussing what we would do if she was to not recover or pass away.  Unfortunately, our discussion went away from medical care and her well-being towards her estate and taxes.

Only six states in the country have an inheritance tax (Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland). LB881 proposes to exempt life insurance proceeds from the state’s inheritance tax, which is a reasonable request since the IRS does not tax life insurance proceeds as income.  Only two states that levy an inheritance tax also tax life insurance proceeds, Nebraska and Kentucky.  All the others exempt life insurance from the inheritance tax as LB881 is proposing.

Several proposals have been fielded by the Legislature in recent years to tackle the inheritance tax. In every case, the inheritance tax relief bills were opposed by counties, who protested that inheritance tax revenue is important to their bottom lines. Over the summer, the Platte Institute reviewed county budgets and looked at how much they collected in inheritance tax each year.  In some years, counties received zero money from the tax.  In other years, some counties would collect as much as $10 million from the tax.  According to conversations with multiple Nebraska county treasurers, the irregular revenue stream causes the counties to spend the money ad hoc, mostly filling shortfalls in other funds, with the majority covering shortages in roads funding.

LB881 offers a compromise.  Counties cannot rely on the inheritance tax money on an annual basis because it is an irregular revenue stream. Those families that have a large inheritance will still have to pay the tax, but this bill carves out a portion of that to allow these families some tax relief.

The Tax Foundation reports that inheritance taxes are among the most hostile to economic growth and have high compliance costs. A study by George Mason University found that states would gain more revenue in the long run by eliminating the inheritance tax due to its economically destructive impact on capital formation and investment. In Nebraska, those most impacted by the inheritance tax are farmers, ranchers, and family businesses, as the inheritance tax makes it difficult to pass property from one generation to the next.  Many Nebraska farms and ranches are family owned.

The negative effects of the inheritance tax on family farms and family traditions cannot be ignored. Agriculture is key to Nebraska's economy.  This became evident when the Bureau of Economic Analysis showed Nebraska had negative economic growth at the end of 2016 and early 2017 due to a contraction in the agriculture sector.  According to the U.S. Department of Agriculture, the net income of agricultural households is higher than the average American household, yet much of that wealth is in farm- or ranch-related assets, making many agricultural households land rich but cash poor. This means that on paper agricultural household income is high, making them very susceptible to inheritance tax liability.

For many, the only way to pay for that tax is to sell equipment, land, or even the entire farm or ranch. Small businesses are often in the same situation with wealth tied up in business capital that would have to be liquidated in order to pay the tax. In both situations, if the business, farm, or ranch survives the tax, a tax on productive capital, unsurprisingly, makes it less productive, and it leaves it with fewer resources with which to expand the business and create jobs. 

I know this committee is going to hear a lot of bills about changing the property and income tax this session.  Clearly, the government is getting plenty of revenue from these families and businesses in other ways.  The inheritance tax is an additional layer of taxation on top of everything else.  When a family member dies, there should be a simple ownership transfer to the next generation, and exempting life insurances proceeds will make that transfer a little easier.

Thankfully, my grandmother is back at home and is recovering.  She lives in Florida, so my family isn’t subject to an inheritance tax. But it made me think of all the people in Nebraska that do have to worry about it. I ask you to please support LB881 in an effort to make death a little less stressful for those family members in Nebraska, and to support good tax policy.

Thank you and I’m happy to take any questions from the committee.