With Iowa and New Hampshire in the rearview mirror, many are predicting a collision course between leftist populist Bernie Sanders and centrist technocrat Michael Bloomberg. Despite their obvious differences, the two candidates share one thing in common: they both have endorsed an expansion of the federal estate tax, a tax on wealth passed from one generation to another. An estate tax is a brand of inheritance tax, designed to reduce inequality by reducing the amount of wealth that can be passed on from one generation to the next and thus limiting intergenerational perpetuation of inequality.
But states that are interested in reducing intergenerational inequality don’t have to wait for the federal government to levy an estate tax. Currently, seventeen states have either an estate tax (assessed on the estate of wealthy people) or a direct inheritance tax (assessed as income for a beneficiary of an inheritance).
Ohio does not currently have an estate tax, since its was repealed in 2013. Ohio’s estate tax was previously a significant source of revenue, raising between $25 and $170 million per year from 1975 to 2014 according to Ohio Legislative Service Commission historical numbers. When comparing the estate tax to Ohio’s GDP, it was fairly stable early on, raising between 0.025% and 0.035% of GDP from the mid 70s to the mid 80s save a spike in revenue in 1983. After dipping to 0.02% of GDP in 1985, the estate tax increased steadily until it hit a localized peak in 2001 at a little over 0.04% of GDP. Estate tax reform at this point cut the relative size of the estate tax by three quarters by 2006, then subsequent reform all but eliminated it by 2015.
Data from the Ohio Legislative Service Commission and the Bureau of Economic Analysis. GDP for 2019 imputed using historical GDP growth trends.
Ohio’s neighbors take a mixed approach to taxation of inheritance. Indiana, Michigan, and West Virginia do not have inheritance taxes, having effectively repealed their own estate taxes in 2013 in Indiana and 2005 in Michigan and West Virginia. Kentucky, on the other hand, has a fairly substantial inheritance tax, which applies to extended family and beyond but covers a large proportion of inheritance transfers. This results in a tax that raises about $50 million per year, which comes out to about 0.025% of GDP, about the rate of Ohio’s estate tax in 1990. Pennsylvania’s inheritance tax is even broader, covering all transfers besides transfers to spouses and parents and raising about a billion dollars per year. With these elements, the estate tax amounted to about 0.128% of state GDP in Pennsylvania in 2018, making it about fives times as large a program as Kentucky’s on a relative scale and twice as large as Ohio’s at its 1983 peak.
If Ohio instituted an inheritance tax at Kentucky’s rate, it could raise about $180 million in revenue in 2020 if the state grows at historical rates. If its inheritance tax were closer to the size of Pennsylvania’s, it could raise revenue of about $960 million. For reference, with $180 million Ohio could fund all of its state Supreme Court and Judiciary services for the year and with $960 million it could fund the entire operations of the Ohio Department of Job and Family Services, in charge of all state job, unemployment, food assistance, and child support services. An inheritance tax for the state of Ohio could potentially reduce inequality and raise revenue for state services at the same time.