Feb. 17: New Report on Nebraska’s Inheritance Tax
VIRTUAL NEWS CONFERENCE with the Platte InstituteFebruary 17, 2021
Contact: Adam Weinberg
(402) 500-0209
aweinberg@platteinstitute.org
Feb. 17: Death and Taxes
Revenue Committee to hear proposals on inheritance tax on Thursday
OMAHA, NE – Nebraska is one of only six states that levies an inheritance tax. As lawmakers consider how to modernize Nebraska’s tax code to be comparable with faster-growing states, a new Platte Institute report says the inheritance tax is one area overdue for reform.
The latest policy brief by Platte Institute Policy Director Sarah Curry, Death and Taxes: Nebraska’s Inheritance Tax, is attached in PDF format here: Death & Taxes Nebraska’s Inheritance Tax. The report is also available at PlatteInstitute.org/Policy.
Curry will provide an overview of the paper and take questions on a virtual news conference held on Zoom. The conference is scheduled for Wednesday, February 17, 2021 at 10:30 a.m. Central Time. Registration is required at this link.
In the report, Curry reviews the history of the inheritance tax in Nebraska, which is one of Nebraska’s oldest existing taxes. When it was adopted by the then-bicameral Nebraska Legislature in 1901, Nebraska had no income or sales tax. Lawmakers reasoned that an inheritance tax would help counties recover revenues that were being lost from taxpayers failing to report household property that was subject to property tax in that era.
Despite numerous legislative efforts to reduce or eliminate the inheritance tax over many decades, the levy remains in place, in part due to opposition from county governments, which are the only political subdivisions that collect inheritance taxes in Nebraska. The tax brought in a total of $63 million for counties in the 2019-2020 fiscal year.
Because each county administers its inheritance tax separately, available statewide data and reports on the tax have been limited on each occasion lawmakers considered changes to the tax in the past. Through public records requests, reviews of county audits, information from the Nebraska Association of County Officials, and the state auditor, Curry’s new report provides a comprehensive look at the inheritance tax that was previously unavailable to state lawmakers and the public.
The data show that while the uncertain timing of when property owners will die means a county might receive a significant windfall, or receive little or no inheritance tax revenue in a given year, counties typically collect 3-4% of their total revenue from the inheritance tax annually.
At the beginning of the 21st century, about half of U.S. states had already repealed their inheritance tax. But when Congress passed a phase out of a federal tax credit that covered a share of the cost of state-level death taxes in 2001, more states began to repeal the tax over the following 20 years. In the report, Curry provides solutions for reforming or replacing the tax, including a gradual increase in the inheritance tax exemption, and allowing counties greater authority for levying local sales tax with voter approval.
In the 107th Nebraska Legislature, senators are holding hearings on two bills related to inheritance tax reform, Sen. Robert Clements’ LB310, which would reduce inheritance tax rates and increase exemptions over a period of years, and Sen. Wendy DeBoer’s LB377, which would classify more distant family members as eligible for a lower inheritance tax rate. Those hearings will be held on Thursday, February 18, 2021.
“The inheritance tax is contrary to the idea of tax modernization because it is a holdover from a tax system and economy that no longer exists,” Curry writes in the report.
“Given that there is no sign that other states will reinstitute their inheritance taxes in the 21st century, Nebraska should recognize that it is in the state’s interest to repeal the tax, if not immediately, then over a reasonable period of years,” Curry writes.
Here are more highlights on this topic:
- Nebraska’s inheritance tax rate and exemption amount varies based on the heir’s relationship to the decedent. Spouses are fully exempt. Other close relatives pay a 1% tax on inheritances greater than $40,000. Near relatives pay 13% on inheritances in excess of $15,000, while all other heirs (more distant relatives and non-relatives) pay 18% on inheritances greater than $10,000, which is the country’s highest inheritance tax rate.
- The original exemption for Nebraska’s inheritance tax was set at $10,000 in 1901. If the exemption had kept pace with inflation, property would not be subject to inheritance tax until it was valued at approximately $306,000.
- The inheritance tax has compliance costs that can be unique from other taxes because inheritances are administered by county courts, requiring heirs to hire an attorney to secure their property. In addition to the tax paid to the county, heirs often pay 1-2% of their inheritance in legal fees. Inequities from the tax can also arise due to estate planning differences. Those with sophisticated estate plans may be able to avoid inheritance taxes, while decedents who are less prepared might leave their family or friends with heavy tax obligations.
- Academic studies provide evidence that inheritance taxes discourage migration into a state, that states are competing on the basis of whether inheritances are taxed, and that the taxes impact capital formation and economic growth. One study found that a 1% increase in a state’s average inheritance tax rate is associated with a 1.4 to 2.7% decline in the number of federal estate tax returns filed in each state, with estates over $5 million particularly responsive to rate differentials. Another study found “that a 10% decrease in the estate/inheritance tax share of a ‘competitor’ state leads to between a 2.2 to 4.3% decrease in the state’s own estate/inheritance share.
- In the Tax Foundation’s 2021 State Business Tax Climate Index, the competitiveness of Nebraska’s property tax systems is ranked 41st, or among the ten worst nationally. One of the variables included in the ranking is the imposition of an inheritance tax. The five other states with inheritance taxes are Iowa, Kentucky, Maryland, New Jersey, and Pennsylvania. In the 2021 legislative session, lawmakers in Iowa have advanced a bill to repeal their inheritance tax.
- A new Platte Institute poll asked 862 likely voters in Nebraska whether they thought it was important to reduce or eliminate the inheritance tax. A total of 64% of respondents said it was very important, while 15% said it was somewhat important. Fifteen percent said it was either somewhat unimportant or very unimportant. Five percent were unsure. Voters who considered reforms to the inheritance tax very or somewhat important included 91% of Republicans, 66% of Democrats, and 74% of independents.
For more information on this release, please contact Adam Weinberg at (402) 500-0209 or aweinberg@platteinstitute.org.
The Platte Institute advances policies that remove barriers to growth and opportunity in Nebraska. More media resources are available at PlatteInstitute.org/Media.