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The State of Maryland imposes a tax on property that passes at or after the death of an individual through an estate tax and an inheritance tax.

The estate tax does not apply to estates that are valued at less than $1 million and it does not apply to portions of estates that are given to a spouse. Maryland law also has special provisions limiting the impact of these taxes on agricultural land. The estate tax rate is 16% and the inheritance tax rate is 10%.

Estate tax revenues for Maryland are expected to exceed $150 million this year, with another $50 million generated by the inheritance tax. Those revenues, though, will be lost because of a bill signed yesterday by the Governor.

Beginning in 2015, HB 739 will increase the amount of wealth that can transfer at death free of estate taxation.

Marylanders who die in 2015 will only be taxed on any assets in excess of $1.5 million. In 2016, $2.0 million will be exempted. In 2017, the exemption amount increases to $3.0 million, and in 2018 it increases to $4.0 million. In 2019, the Maryland State exemption amount will be equal to the amount excluded under the federal estate tax law.

At the federal level, the estate tax is levied only on assets in excess of $5 million. This number is indexed for inflation, and is now $5.34 million.

According to the Maryland Legislature’s nonpartisan Department of Legislative Services, this increase in the estate tax exemption amount will cause the loss of about $200 million in tax revenues through 2019 and is expected to result in the loss of tax revenues of more than $150 million per year every year thereafter.

Why did the Legislature do this, and is it good policy?

Theodore Roosevelt’s 1906 State of the Union speech might reflect one set of views about this decision:

The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government. Not only should he recognize this obligation in the way he leads his daily life and in the way he earns and spends his money, but it should also be recognized by the way in which he pays for the protection the State gives him. On the one hand, it is desirable that he should assume his full and proper share of the burden of taxation; on the other hand, it is quite as necessary that in this kind of taxation, where the men who vote the tax pay but little of it, there should be clear recognition of the danger of inaugurating any such system save in a spirit of entire justice and moderation. Whenever we, as a people, undertake to remodel our taxation system along the lines suggested, we must make it clear beyond peradventure that our aim is to distribute the burden of supporting the Government more equitably than at present; that we intend to treat rich man and poor man on a basis of absolute equality, and that we regard it as equally fatal to true democracy to do or permit injustice to the one as to do or permit injustice to the other.

I am well aware that such a subject as this needs long and careful study in order that the people may become familiar with what is proposed to be done, may clearly see the necessity of proceeding with wisdom and self-restraint, and may make up their minds just how far they are willing to go in the matter; while only trained legislators can work out the project in necessary detail. But I feel that in the near future our national legislators should enact a law providing for a graduated inheritance tax by which a steadily increasing rate of duty should be put upon all moneys or other valuables coming by gift, bequest, or devise to any individual or corporation. It may be well to make the tax heavy in proportion as the individual benefitted is remote of kin. In any event, in my judgment the pro rata of the tax should increase very heavily with the increase of the amount left to any one individual after a certain point has been reached. It is most desirable to encourage thrift and ambition, and a potent source of thrift and ambition is the desire on the part of the breadwinner to leave his children well off. This object can be attained by making the tax very small on moderate amounts of property left; because the prime object should be to put a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit to this country to perpetuate.

Another perspective would be that taxes are burdensome and governmental activity should be limited whenever possible.

Perhaps both perspectives are valid and not mutually-exclusive.

But in this case we need not get into a debate about the proper role of government, since this is a law that was not well-considered.

This law was passed with the explanation that it would make Maryland an attractive state to live in, avoiding the flight of multimillionaires who want to die in a state without a state estate tax. Unfortunately, the legislature missed the mark.

Preliminarily, it is worth noting that most studies on the issue find that tax rates have little effect on interstate mobility. See the article by Bakija and Slemrod at

But even if we assume that these rates do affect families’ decisions about where to live, this law won’t make Maryland more attractive for wealthy families.

There are 32 states that have totally repealed all of their estate and inheritance tax. If the legislature wants to keep people from leaving Maryland, they should have mated those 32 states by pasing a full repeal of both the estate tax and the inheritance tax.

A husband and wife with $50 million of assets would be faced with a nominal Maryland estate tax bill of $7.3 million if they both died in 2014, but the actual tax cost is about $4.4 million because of the deduction of the Maryland estate tax from the federal estate tax bill. By increasing the Maryland exemption to the federal level, the bill decreases this couple’s estate taxes by about $930,000 after taking into consideration the federal deduction for the state tax payment.

This law has reduced this couple’s state estate tax bill by about 20%. If they are considering leaving Maryland so that they can reduce their estate tax bill, this reduction is not enough to convince them to stay.

The legislature’s goal might have been to reduce the estate tax burden faced by families with assets of $1 million to $10 million. But had that been the goal, the most obvious first step would have been to enact portability. “Portability” refers to the rule that allows a surviving spouse to use her deceased spouse’s unused exemption amount. (In other words, if Abraham died with $3 million, the $2 million unused portion of his $5 million exemption can be used by his surviving wife, so that Sarah would have a $7 million exemption amount.) By adding Portability, the legislature would have eliminated the need for many couples to have to use credit shelter trusts to minimize Maryland estate taxes. But the legislature did not do that. Instead, they left Portability out until 2019.

There are many reasons why reducing and eliminating taxation (including, of course, estate taxes) can be good public policy. But in this case the Legislature appears to have acted without constancy and without adequate thought. The result is a poor change which deprives the public fisc of much-needed resources without a commensurate reduction in governmental activities and without a source for replacing lost taxes. Its stated reason for acting appears not to have truly been its real reason, else it would have acted differently. In short, this appears to be a poorly-considered change in law.

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