Oregon’s Inheritance Tax: A Deterrent to Retirees

Right From the Start

Yesterday’s Oregonian carried an article noting that Corvallis had joined the Forbes magazine’s Top Twenty-five places to retire. I have to say that I was surprised. But it was a mixed bag of surprises for me.

First, I was surprised that there aren’t more cities in Oregon that earn that distinction. After all we have Bend and its spectacular high desert vista. For anyone that enjoys the outdoors few places can rival Bend for four seasons of activities: skiing, golf, water sports, golf, hiking, golf, biking, golf, climbing, golf, and did I mention golf? Add to that a vibrant and diverse restaurant experience highlighted by small, intimate dining spots. And to top it off a highly rated medical community for those of us who are not so young anymore.

And then there is Medford/Ashland with it scenic beauty, a moderate climate, quality healthcare, access to fishing, hiking, biking and yes – golf. And you have great dining, particularly if you include areas like Jacksonville and Ashland. And Ashland still has one of the premier arts communities in the West.

In fact, it is hard to find places in Oregon – other than Portland which is overrun with drugs, crime and liberals, the latter usually attracting the former two – that do not fit much of the criteria used by Forbes in its evaluation. Even the higher cost of housing in many cities should not be a deterrent as evidenced by Corvallis’ inclusion with a twenty percent premium over the national average for housing costs.

But there is a downside to retirement in Oregon and one that I think Forbes didn’t thoroughly investigate – taxes. And that was the second surprise.

You can argue endlessly about whether the high income tax burden imposed by Oregon results in a greater, lesser or equal tax burden to those states that rely heavily on the sales tax. That argument grows when you factor in the “user fees” imposed by various states including Oregon. Even the level of property taxes in Oregon compared to other states is difficult to pin down because of the limitations on determining the underlying taxable value. It’s really a toss of the coin for someone facing retirement as to whether sales taxes or income taxes are their preferences. But there is one area of taxation that should be of critical importance to retirees and does provide a critical deterrent to retirees – inheritance taxes. And the fact that it was not included by Forbes surprised me.

For years, the federal government allowed a credit for state death taxes to be applied to amounts owing for federal estate taxes. Although not initially intended as such it became a windfall for states who could increase their inheritance and estate taxes to the full amount of the federal estate tax without impacting the taxpayer – it was “robbing Peter to pay Paul.” But effective in 2001, Congress eliminated the credit for state death taxes and began a multi-year increase in the amount of an estate exempt from federal taxation. That amount is currently about $5.4 Million and is indexed to increase annually.

According to Politifacts of Oregon, twenty-nine states allowed their death taxes to expire, or otherwise eliminated them, when the federal government eliminated the credit for state death taxes. Only three of the states west of the Mississippi River, including Washington, Oregon and California (the three states that never met a tax that they couldn’t live without) re-enacted their death taxes. Although Oregon allows an estate to pass to a surviving spouse without application of the tax, the second death imposes a significant burden on the estate and its recipients.

Let’s understand that Oregon’s sky high death tax does not effect the quality of life for retirees and perhaps that is why Forbes failed to consider it in its rankings of desirable places in which to retire. However, two factors impose consideration of the effects of the death tax on those choosing to move to or remain in Oregon.

First, Oregon is primarily a “small business” state. Its economic engine is fueled significantly by small, family owned businesses. The ability of those businesses to continue should be of interest to the state’s policy makers. And here, Oregon’s death tax can have a substantial impact. Currently, an investment producing an annual income of $150,000 at five percent (double the inflation rate and twenty times greater than passbook savings rate) would require $3,150,000. (For those of you forced to endure a teachers union directed education in the Portland public schools that would mean . . . oh, forget it. It would be like trying to teach economics without admitting to profits.) That would also be the value of a business producing that level of pretax income. The Oregon death tax on an estate valued at $3,150,000, after exempting the first $1,000,000, would result in a tax of $220,750. That is money that the family business would have to borrow or forego reinvesting in the business. Trust me, a business producing $150,000 is in a daily fight to survive. An unexpected penalty of nearly a quarter million dollars could be the difference between survival and bankruptcy.

Second, it is now widely accepted that the current generation and the next generation may find themselves in the unenviable position of not having the opportunity to succeed at the same level as their parents. For many of us in the “retired or retiring” generation, passing wealth to our children is a way to mitigate that effect. Spreading an estate valued at$5.4 Million (the amount currently exempt from federal estate taxes) among your children and grandchildren will help them without creating extraordinary wealth. Remember this is not Kennedy wealth, or Clinton wealth, or even Romney wealth – it is better described as mainstreet success wealth. But in Oregon, the death taxes due would equal over $480,000 – an amount that would be crippling even for a successful mainstreet business.

Even for all of those liberals, those big government advocates and those public employee union zealots anxious to sustain the abundance of public spending, it is not unreasonable to suggest that exemptions from Oregon’s death tax mirror those of the federal government. Were that to occur, many who have fled Oregon or looked at Oregon as a place to retire and passed, might reconsider.