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Abolish the RI estate tax

February 4, 2011

Rhode Island liberals and conservatives are once again battling over the estate tax. WRNI political analyst Scott MacKay says it is time for both sides to chill the rhetoric and consider the practical impact of this tax on our economy.

Rhode Island conservatives are once again in a tax-cutting mood, this time calling for an end to the estate tax, which hits the wealthy. They have the support of the Ocean State Policy Research Institute, a research group that argues for smaller government and laissez-fair economic policies. And Alan Hassenfeld of the family that turned toymaker  Hasbro into an iconic company supports repeal, asserting that the tax drives rich people out of Rhode Island.

Liberals counter that there are no reliable studies showing that the well-off are actually leaving the Ocean State. The debate has deteriorated into a blizzard of census data and IRS numbers that makes the eyes of the average Rhode Islander glaze over.

Hassenfeld and his family have been good to Rhode Island.  Some of the profits from G.I. Joe, Play-Doh and Mr. Potato Head have financed the Hasbro Children’s Hospital and other charities. The company doesn’t manufacture anything here anymore, but its headquarters is still on Newport Avenue in Pawtucket. Rhode Island would be a better place if more people were as generous as the Hassenfelds.

But Rhode Island has also been good to the Hassenfelds. In 1996, rival toymaker Mattel wanted to take over Hasbro. The Rhode Island General Assembly moved quickly to stop the merger. Without even holding any hearings, the House and Senate approved a legal roadblock to the Mattel move. Days later, Mattel backed down.

Too often the arguments focus on whether the estate tax is fair or not. Conservatives call it the “death tax’’ and argue that the wealthy should not be punished for being successful and that abolition of this tax is needed to pass family businesses from one generation to the next. Liberals say that the very wealthy have a responsibility to help pay for the well-being of society.

No less a capitalist than Andrew Carnegie, the Scottish immigrant who went from steel magnate to public library baron, called the estate tax the fairest form of taxation. But our nation and state seem a long way from Carnegie’s social gospel of wealth theory; nowadays the moneyed hire lobbyists to avoid paying taxes. Rare is that affluent person nowadays who echoes the words of Oliver Wendell Holmes, who said famously that taxes are the price we pay for civilization.

Rhode Island’s estate tax only applies to fortunes of at least $859,000, a threshold lower than most states yet far below the federal standard of $5 million. So whatever the data shows, it is likely that some wealthy people are transferring their assets to states with lower estate taxes, especially Florida.

Dyed in the wool New Englanders may consider Florida a state that resembles Bald Hill Road with palm trees and wonder why anyone would want to live in a place with no there there.

But pragmatism must trump ideology. Rhode Island government now gets almost nothing from the estate tax. The House fiscal office estimated it will bring in just $28 million this year in a general fund budget of about $3 billion.

There is precedent for eliminating a tax that doesn’t bring Rhode Island any real money. In the 1990s, the state got rid of the passive investment tax. (This was an initiative first pushed by banker Terry Murray).  Massachusetts, where the mutual fund was invented, did not. At the time, Massachusetts government was getting several hundred million dollars a year from this tax because of all the mutual fund companies headquartered in Boston.

What happened then? Well Fidelity Investments, the Boston mutual fund giant, decided to expand in Rhode Island, building a large facility in Smithfield that brought more than 1,500 white-collar jobs here. (After Fidelity expanded in both Smithfield and in New Hampshire the  Massachusetts legislature adjusted the tax).

Then-Governor Lincoln Almond recalled last week that the tax change was instrumental in putting Rhode Island on Fidelity’s expansion radar screen. It led Fidelity chief Ned Johnson to meet with Almond to negotiate the Smithfield deal.

If abolishing the estate tax keeps the wealthy and their philanthropic money here, why not repeal  it?

3 Comments leave one →
  1. February 4, 2011 5:51 pm

    Scott is absolutely right that a tax that delivers little in revenues ought to go.

    RI has the 16th highest median income. The money is here, but obviously not after retirement. We all know well to do people who keep homes in Florida for reasons other than the weather.

    Retirees still pay income taxes without burdening the schools. They’re a good deal for any state and should be encouraged to stay.


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