As Mass. moves to ease estate tax policy, R.I. lawmakers remain divided

As Massachusetts advances a measure to ease estate taxes, Rhode Island lawmakers are unconvinced they should do the same.

Mass. Gov. Maura Healey’s proposal to increase the Commonwealth’s estate tax exemption from $1 million to $3 million was touted as a way to boost economic competitiveness as other states kill their own estate taxes altogether. A scaled-back version of Healey’s proposal — increasing the exemption from $1 to $2 million —  secured approval from the Massachusetts House of Representatives in April. 

Central to the debate in Rhode Island is the question of who benefits — and loses out — from letting more residents avoid the “death tax.”

“More and more states are passing bills to eliminate the estate tax,” Rep. Patricia Morgan, a West Warwick Republican, told members of the House Finance Committee at a May 9 hearing. “We should too.”

Rhode Island is one of only 12 states, plus the District of Columbia, that tax property, money or other assets bequeathed to a family member or friend after death, according to the Tax Foundation. And it’s one of only three states — including Massachusetts — with an exemption below $3 million.

Opponents to reform in Rhode Island counter that only the wealthiest residents are burdened by paying taxes on inheritance over the state’s current $1.73 million threshold, and those people are hardly the top priority for financial relief. 

“Let’s call it what it is, a tax cut for the rich,” Nina Harrison, policy director for the Economic Progress Institute, said in a separate hearing before the Senate Finance Committee on Tuesday.  

The back-and-forth between opposing sides has played out over a series of State House hearings this month, with no clear indication where any of the four pieces of proposed legislation are headed.

The Massachusetts Senate has yet to take up the $654 million tax relief package approved by its House, but Rhode Island lawmakers are paying close attention to their northern neighbor. 

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Morgan, who has proposed eliminating Rhode Island’s estate tax entirely, warned that the onerous tax burden — up to 16% depending on the size of the estate — was forcing wealthy residents to flee the Ocean State. 

Just ask Rep. Gregory Costantino. The Lincoln Democrat, who has proposed incrementally increasing the estate tax over the next eight years to reach the federal exemption threshold, said his own financial planner advised him to consider moving to Florida rather than leaving his family with a hefty tax bill when he dies.

“The wealth is leaving the state,” Costantino said at the May 9 hearing. “People who have worked hard, family businesses are leaving the state.”

Rep. Teresa Tanzi, a Narragansett Democrat, was not sympathetic to Costantino’s plight.

“I laughed out loud,” she said in response, explaining that she will never have even close to a $1.7 million estate to leave behind after her death. 

As for those who will have to pay the estate tax, whatever inheritance they receive should be plenty to cover that bill, she said.

But how pervasive a problem does Rhode Island’s death tax pose? There is no available state data on how many residents pay an estate tax now, nor on how many more leave the state because of it. 

Without hard numbers, the two sides relied on anecdotal evidence to support their perspectives. 

Costantino recounted conversations with two financial planners who each said they had about 10 clients per year to whom they advise leaving the state rather than run the risk of leaving their descendants with big tax bills.

The rapid rise in real estate values has also pushed more people over the exemption threshold, according to Sen. David Tikoian, a Smithfield Democrat whose companion bill to Constantino’s was heard in the Senate Finance Committee on May 9.

“With the value of housing today, someone could own a house like my parents did, where they paid only $26,000 in the ‘70s and now it’s worth $600,000, $700,000 or $800,000,” Tikoian said. “If people save their money and have two 401(K)s, it’s not that unrealistic to get to that $1.7 million threshold.”  

Sen. Thomas Paolino, a Lincoln Republican who has proposed his own version of an incremental increase in the estate exemption, also warned of an unspecified number of families being forced to sell off assets to avoid a hefty tax bill.

“This is a burden on families who have lost a loved one,” Paolino said during a Tuesday hearing on his bill.

Alan Krinsky, director of research and fiscal policy for the Economic Progress Institute, framed the impact differently. Krinsky estimated only a few hundred residents each year are subject to estate taxes under the current, lower threshold. As for losing residents to more tax-friendly states, “it’s not the mass exodus we keep hearing about,” Krinsky said.

Giving more people a break on estate taxes could, in turn, have grave consequences for state coffers. The estate tax contributes more than $30 million a year. Raising the estate tax exemption threshold would cost the state over $100 million in revenues over the next decade, Harrison said, 

A fiscal note from the state budget office included with Costantino’s bill projects a $17.8 million loss in estate tax revenue by fiscal year 2031, when Rhode Island’s estate tax would match the federal exemption (which is $12.9 million for 2023).

All four pieces of legislation proposing estate tax changes remained in their respective chambers’ finance committees for further review as of Wednesday.