Pennsylvania Estate Tax: A $1.2 Billion Burden | Pennsylvania
(The Center Square) – Pennsylvania created an estate tax in 1826 to build a canal connecting Lake Erie to the Ohio and Susquehanna rivers, imposing a 2.5% levy on inheritances that went to those who did not. were not direct descendants.
Today, the Commonwealth receives approximately $1.2 billion in revenue with an inheritance tax ranging from 4.5% to 15% and affects all inherited wealth. Pennsylvania is one of six states that still have an estate tax, and with no exclusions that limit when the tax is applied. Middle-class heirs can be hit with an unexpected tax burden after a death.
Typically, taxes were a means of shifting the burden of financing the state government onto the wealthy and away from the average taxpayer.
“In Pennsylvania, it’s actually different where Pennsylvania’s estate tax falls on more people than most other states,” said Katherine Lughead, senior policy analyst at the Tax Foundation. “It certainly hits the middle class much harder than most other estate or estate taxes.”
As a result, Pennsylvania’s estate tax revenues stand out from those of its neighbors. New Jersey generates $468 million from its estate tax, while Maryland generates just under $59 million. Maryland also makes $139 million from an estate tax.
“It also has a particularly detrimental impact on business,” Lughead said. “If someone is about to inherit a business, if they don’t have enough cash to pay that inheritance tax immediately, they’re going to be in a bind.”
Paying the tax, she noted, could force heirs to sell or downsize the business.
The tax has also encouraged some residents to leave, preferring to retire in states like Florida that don’t have estate taxes. If someone leaves property to a spouse, child under 21, or charity, inheritance tax is 0%. However, if a childless person wishes to bequeath property to a niece or nephew, the tax is 15%.
While wealthy Pennsylvanians can use estate planning to avoid some estate tax, middle-class Pennsylvanians whose wealth lies in a small business or home will bear the brunt. To avoid the deadweight loss of people trying to avoid the tax, or to avoid adding a tax that burdens the middle class, states could consider other less distorting taxes.
“The best approach, of course, is simply to repeal [inheritance taxes] or phase it out over time,” Lughead said.