Economic Consequences of Tennessee’s Gift and Estate Tax

Tennessee is one of 19 states with a separate estate tax and one of only two states with a gift tax, which has caused the state to underperform in comparison to other right-to-work states and other states with no earned income tax, low corporate tax, and low overall tax burdens according to authors Arthur B. Laffer, PhD and Wayne Winegarden, PhD.

The cost Tennessee has paid for its gift and estate tax in lost economic growth and employment is staggering. Had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee’s economy would have been over 14% larger in 2010 and there would have been 200,000 to 220,000 more jobs in the state. And, the more robust economic growth would have benefited state and local government revenues adding between $7 billion and $7.3 billion to state and local coffers.

Potential gift and estate tax payers expend effort and money to avoid the tax. Many leave the state in anticipation of Tennessee’s death tax taking with them jobs, spending, investments, and entrepreneurial skills. Once gone, they are loath to come back. Potential immigrants to Tennessee are also put off by Tennessee’s extreme gift and estate tax.

The average taxable estate in Tennessee is consistently smaller than the U.S. average. In 2010 the average size of a federal estate filed in Tennessee was almost 25% smaller than the U.S. average federal estate, or $1,350,000 less. And, in Tennessee there were over 20% less federal estates filed per 100,000 population than the U.S. average. People really do leave Tennessee because of Tennessee’s gift and estate tax—and they leave in droves.

The economic damage created by Tennessee’s gift and estate tax can also be estimated by examining the extent that Tennessee’s asset base is reduced. It is important to note upfront that because estates reported to the IRS have declined over time due to changes in federal reporting requirements, and the total value of estates is less than the total value of assets lost, the economic damages calculated based on the lost estates significantly understate the true economic damage. Yet, the economic costs are still staggering. Tennessee’s gift and estate tax has lowered the state’s asset base by at least $16.6 billion to $48.3 billion reducing the size of Tennessee’s economy, as measured by gross state product, by between $6.1 billion to $18.2 billion.

Quite simply, Tennessee’s gift and estate tax is the single greatest reason why wealthy people don’t want to live in Tennessee. Many leave the state and few move into Tennessee. They take all their jobs, entrepreneurship, spending, homes and wealth with them. This is the single greatest detriment to Tennessee’s growth and Tennessee’s ability to raise sufficient tax revenues. If Tennessee’s gift and estate tax were repealed or greatly reduced Tennessee’s state tax revenues would increase, not decrease.

This paper was released jointly with the Beacon Center of Tennessee.

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