Why Moore’s plan to reform MD’s wealth transfer taxes ran aground

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Gov. Wes Moore‘s proposal to end Maryland’s status as the only state with two taxes on the transfer of wealth after death — by eliminating the inheritance tax and requiring more people to pay the estate tax — failed during the recent legislative session after facing strong opposition from estate planners, personal accountants and local registers of wills.

Lawmakers have said they don’t expect to take up the proposal again next session, though it remains to be seen whether the governor will alter his approach and try again. A spokesperson for Moore said the governor will continue to examine ways to reform the estate and inheritance taxes to “better serve Marylanders” and improve the state’s competitiveness.

The plan was a lesser-known component of the governor’s expansive tax reform plan, which, along with roughly $2 billion in spending cuts, he proposed to balance the budget amid projections of a massive structural deficit.

Moore’s broad tax proposal set the tone for budget negotiations with the legislature, which concluded with an agreement among House and Senate leaders to approve some portions — like adopting progressive income tax reforms and implementing a surcharge on capital gains income — and abandon others.

“During the busy legislative session, it became clear that the administration’s proposal to eliminate the inheritance tax was an important yet complex proposal,” Moore spokesperson Brittany Marshall said in a statement Wednesday. “The governor remains committed to continuing our work to simplify and modernize the state’s tax code with a focus on economic competitiveness in the years ahead.”

Once House and Senate leaders began their negotiations, the inheritance and estate tax proposal was among the first options they took off the table.

Senate Budget and Taxation Committee Chair Guy Guzzone said he understood the logic behind the governor’s desire to end Maryland’s status as the only state with both taxes, but several concerns, beginning with confusion about whether the proposal would inadvertently defund local registers of wills, prompted him and other top Democrats to strike the proposal in the early weeks of the session.

“It’s more complicated when you think about where the money actually comes from,” Guzzone said in a recent phone interview.

While the estate tax applies to a decedent’s total estate, the inheritance tax is charged to beneficiaries based on what they inherit. In Maryland, filers who may be subject to both can apply the inheritance tax as a deduction to their estate tax.

The inheritance tax also makes up about 90% of the operating revenue for the state’s local registers of wills.

Each of Maryland’s 23 counties and Baltimore City has a register of wills whom voters elected to a four-year term. The registers appoint personal representatives to administer decedents’ estates and they oversee the proceedings, offer safekeeping for people’s wills and collect inheritance taxes, among other responsibilities.

Shortly after Moore introduced his budget proposal in January, local registers and their allies in the legislature — as well as state analysts and top lawmakers — said it appeared that the plan would strip them of their main revenue source, without an alternative stream of funding to replace it.

The governor’s team maintained that it was always their intent to fund the local registers at their current levels, and they updated their budget proposal later in the session to do just that.

But the initial confusion certainly didn’t help the proposal’s chances.

“The initial confusion about the register of wills obviously played a role,” Guzzone said.

Opponents of the plan, including lawmakers and local registers, also pointed out that eliminating the inheritance tax would essentially be a tax cut for out-of-state residents.

In Maryland, immediate family members are exempt from the 10% tax, and the extended family or friends who do pay it often live in another state. Recently, slightly more than half of Maryland’s inheritance tax revenue came from people who lived outside the state.

To account for revenue lost by eliminating the inheritance tax, Moore proposed lowering the wealth amount exempt from the estate tax from $5 million to $2 million.

But lawmakers, estate planners and CPAs said that doing so would subject more middle-class filers to the tax, claiming that it’s easier than many people realize to reach $2 million in wealth. For estate planning and tax purposes, an individual’s wealth includes such assets as equity in a home, a balance in a retirement plan and the value of a life insurance policy.

Estate planners and lawmakers also questioned whether lowering the exemption would have prompted especially wealthy filers to settle their affairs in more tax-friendly states, whether by moving or filing in another state where they own property.

Maryland has already been losing residents at a greater pace than neighboring states, and people who leave the state for tax reasons are generally big-time contributors to the state coffers.