Oregon’s Inheritance Tax: A Deterrent to Retirees

Right From the Start

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.

Posted by at 05:00 | Posted in Death taxes | 27 Comments |Email This Post Email This Post |Print This Post Print This Post
  • davidg

    Very informative and interesting. As a retiree with the option of living just about anywhere, you can be sure I won’t be in Oregon very much longer.

    • Conservatively Speaking

      Oregon, not my native Oregon ever since the Dems took over the governmentium, circa 1987.

      • Eric Blair

        Oh please… if Tom McCall was running today you would hate him for being a Rino. The fact is, Oregon has had a history of very liberal, republican, governors. The reason Republicans have such a difficult time now, is they have moved so far to the right that they don’t appeal to centrists and independents. Conservatives have deliberately walked off the playing field and now complain because they don’t win any games.

        • Conservatively Speaking

          You’re nothing butt full of hot air, senor BLAIR.

  • HBguy

    Larry, you know better than to value a business at a 5% cap rate.
    A business that nets 150,000 where the owner doesn’t work, would more likely Be worth between $450,000 and $750,000. So that small business person would Never pay any estate taxes.
    And you also fail to Mention that there is a very simple way for a husband and wife to double their tax exempt estate to $2 million by adding a simple marital trust. In addition to many other things a good estate planning attorney could do to protect assets.
    You have a point, maybe we should increase to estate tax credit, but like a lot of opponents of the estate tax your exaggerated claims made to try to prove that many modest estates are being taxes weakens your argument.
    Finally let me ask you this, do we eliminate the step up in tax basis for inherited assets as part of your reform? If you do then 98% of estates will see a tax increase. And if you don’t then heirs will get profits that are never taxed even once (like appreciated stock)

    • thevillageidiot

      absolutely. the state collects very little now and with the huge pot taxes soon to be added to the coffers why not eliminate the inheritance tax. are you jealous of those who have worked hard to create a legacy and did not include you in the will? Didn’t the person building the wealth pay taxes along the way, create jobs etc. Under your regime why work hard to leave a legacy or inheritance to your children? all your argument is about is that most don’t pay the tax but those who have more are obligated to provide for the social good as a last act? BS.

      • HBguy

        so let’s say you eliminate the estate tax. Let me ask this. Is someone bought Apple stock at $42/ share and sold it at $1,200/share should they pay taxes on the gain? Because under current law, they would . However if the buyer had died, willed the shares to her son and her son sold the shares a week after her death, they would pay zero dollars in taxes on the gain. That’s the step up in tax basis. It’s as if son had bought the shares at the value they had when he inherited them so when he sold them there was no profit. And if that estate was under a million dollars they would pay no estate taxes either.
        Most proposals to get rid of the estate tax also get rid of this step up. So that
        Means we’d be taxing all investment assets in an estate including those under a million while the larger estates got huge reductions.
        And as to the fairness of the tax why shouldn’t that gain on the Apple stock be taxed? It was never taxed before?

      • HBguy

        Oh…and, I’ve done my tax planning to minimize the estate tax hit I’m likely to take.

  • DavidAppell

    Larry, if you don’t like being retired in Oregon, why don’t you move? Your problem will be solved.

    • Ante Maranatha 007

      Pleas be turnstile, DavidAppelll, toward what’s right attending US.
      Udderwise, urine remain in a trough running down a gravitational line draining US of our sovereign democracy, akin to left wing DEMbauchery.

  • IhateLiberals

    This article is almost funny. Anyone with a decent retirement income has already left Oregon and claimed residence elsewhere. In our first full year as residents of Nevada, my wife and I saved over $13K in state income taxes alone. Not to mention 30-40% lower utility bills; and a much nicer home in a gated community.

    • DavidAppell

      Yes, but you have to live in Nevada. Kinda takes the joy out of life.

      WalletHub says Oregon comes in with an average total tax rate (2016) just a little more than 1 pct point above Nevada:

      Nevada: 7.72%
      Oregon: 9.17%

      https://wallethub.com/edu/best-worst-states-to-be-a-taxpayer/2416/

      There are many factors that determine where one might live beyond mere dollars and cents.

      • IhateLiberals

        Seriously you are FULL OF IT! Instead of 6-7 months of gray skies and rain, we enjoy nearly 300 days of sunshine. Some of the best skiing in America just 45 minutes away. Lower property taxes, NO STATE INCOME TAX AT ALL, NO ESTATE TAXES, NO CAPITAL GAINS TAXES and minimal property transfer taxes. And last but not least, we are not paying those absurd sewer taxes the Portland area is stuck with for years to come.

        • HBguy

          From taxrates.com
          “The Nevada (NV) state sales tax rate is currently 4.6%. Depending on local municipalities, the total tax rate can be as high as 8.15%. Other, local-level tax rates in the state of Nevada are quite complex compared against local-level tax rates in other states.”
          I thought Oregonians hated sales taxes

          • IhateLiberals

            Sales taxes are a very small part of what we pay. There are no sales taxes on services at all; and for large purchases such as boats or cars, sales taxes are a deduction on our Federal Income Taxes. Of course, in “smart” Oregon; you are paying 9% state income tax on thousands of dollars in income.

        • DavidAppell

          No amount of tax cuts can make up for Nevada’s culture hole.

          • IhateLiberals

            Keep thinking that dummy. Nevada is the fifth fastest growing state in the nation; has name entertainers in Las Vegas and Reno/Tahoe every week of the year and symphony orchestras in both Las Vegas and Reno. Las Vegas is an international vacation destination and Lake Tahoe is not only one of the most beautiful lakes in the USA; but the home of numerous millionaires and billionaires.
            Oh – and enjoy the next 60 days of rain and gray skies. Maybe you dummies will get a Rose Parade that doesn’t get rained on!

          • DavidAppell

            “Nevada is the fifth fastest growing state in the nation…”

            That is not culture.

            I don’t see any culture coming out of Nevada. And, yes, I’ve been there. It was mostly about cheap crappy stakes and brown desert as far as the eye could see.

            There is nothing special in Nevada.

          • IhateLiberals

            Sorry moron – but “culture” rarely puts living wages in people’s pockets.

          • DavidAppell

            On the contrary, the richest cities in the country, and the world, are those with the most culture. (No, casinos don’t count as “culture.”)

          • IhateLiberals

            Funny how none of those “richest” cities are in Oregon! Bwahahahahahaha!

          • DavidAppell

            Nor Nevada. In fact, Nevada has some of the lowest per capita life expectancies in the country:

            http://www.nytimes.com/interactive/2016/04/11/upshot/for-the-poor-geography-is-life-and-death.html

          • DavidAppell

            “Oh – and enjoy the next 60 days of rain and gray skies.”

            Nor are sunny skies culture.

          • IhateLiberals

            No – but you’re STILL STUCK WITH LOUSY WEATHER! Bwahahahahahahaha!

          • DavidAppell

            76 F yesterday and sunny. Today sunny and going to 84 F.

          • IhateLiberals

            It’s been in the 80s here most of the week; and we can use our outdoor swimming pool almost all year long.

          • DavidAppell

            If you like Las Vegas, good for you. I personally wouldn’t want to live there.

            So what is there to argue about?

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