Healey’s proposed estate tax threshold could have grave consequences in R.I.

THIS 2,816 SQUARE-FOOT, four-bedroom, two-bath, waterfront home in Westerly sold for $1.725 million on March 10, 2023. The sale price is roughly the equivalent to the threshold for when Rhode Island’s estate tax kicks in. COURTESY COMPASS VIA THE RHODE ISLAND CURRENT/ELIZABETH MASTERSON

Rhode Island is always looking over its shoulder at Massachusetts when it comes to taxes.

So as Massachusetts Gov. Maura Healey proposes giving more Commonwealth residents a break on estate taxes, the Ocean State may be forced to take a hard look at its own “death tax” to compete with its northern neighbor.

Rhode Island is one of only 12 states, plus the District of Columbia, that tax property, money or other assets bequeathed to a family member or friend after death. However, there are ways to avoid paying what could be a hefty tax bill (with state tax rates up to 16%, depending on total assets). Chief among them is the state exemption that lets those inheriting less than $1.73 million (as of 2023) in gross assets bypass the estate tax.

Rhode Island’s 2023 exemption threshold is the second-lowest among states that tax estates, exceeding only Oregon and Massachusetts, which both cap the exemption at $1 million. That’s already costing the state sales and income tax revenue and consumer spending when retirees flee to states with better estate tax environments, like Florida, said Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council (RIPEC).

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“You often see when people are ready to retire or sell their businesses, they choose to move,” DiBiase said. “We lose out economically, because we lose that spending and the economic activity those people would generate if they stayed here.”

Don’t go. Please stay!

The exodus of wealthy and even middle-income Rhode Islanders could grow as Massachusetts considers upping its tax exemption threshold. Healey has unveiled a sweeping set of tax reforms aimed at making the commonwealth more economically competitive, including raising the estate tax exemption from $1 million to $3 million.

If approved by the Massachusetts Legislature, that would put Rhode Island at a clear disadvantage, DiBiase said.

“When we look at taxes generally, Massachusetts is the most important benchmark because our economies are so integrated,” DiBiase said. “If they increase their estate taxes, I think you would see some consequences here.”

It’s hard to put a number on those consequences though. Rhode Island brought in $39.3 million in revenue from estate taxes in fiscal 2022, and preliminary estimates for fiscal 2023 suggest the state could see $58.8 million in estate tax revenue.

Healey’s proposal is projected to cost Massachusetts $167 million in the coming fiscal year, and $275 million on a fully annualized basis, according to a statement from Healey’s office.

But there’s also money to be made from incentivizing retirees to stay in state by easing estate taxes. Which is why the Tax Foundation recommended that states should eliminate their estate taxes altogether.

“It’s a very inefficient tax economically,” said Timothy Vermeer, senior state tax policy analyst for the Tax Foundation. “All the money and effort put into avoiding the estate tax could be spent to benefit a state economy.”

Legislative fixes need bipartisan support

Republican Rep. Patricia Morgan of West Warwick has introduced a bill that would immediately end the Rhode Island estate tax.

Morgan called the estate tax a “net negative,” costing the state millions in revenue, as well as businesses, expertise and philanthropy when residents move out of state. Morgan’s bill had no Senate companion as of March 14.

Meanwhile, identical bills introduced in the House and Senate offer a more gradual approach to the same goal. The bills introduced by Rep. Gregory Costantino of Lincoln, and Sen. David Tikoian of Smithfield, both Democrats, would gradually increase Rhode Island’s estate tax exemption over eight years until it matches the federal estate tax exemption (which is $12.9 million for 2023).

It is the third year Costantino has introduced this bill, but the first time he has a Senate sponsor for companion legislation, he said. He was hopeful that the Senate companion bill as well as Healey’s Massachusetts proposal would fire up lawmakers to “have a conversation” about making Rhode Island’s estate tax more competitive.

In this real estate market, you don’t need to own a Newport mansion to have a $1.7 million home. The value of modest property in coastal communities could easily reach the estate tax threshold.

“When you think about real estate values today, or if you have a 401(k), you can get to $1.7 million pretty quickly,” Costantino said. “I find it problematic that all those people are going to be taxed, or move out of state.”

People like himself. A landlord for several residential and commercial properties, Costantino, 62,  said he or his wife — whoever outlives the other — would have to move out of state to avoid passing a hefty estate tax bill onto their children.

“I love this state but if my wife doesn’t move out after I die, my children are going to get hit over the head,” he said. “I find that problematic.”

As for the revenue the state would lose by increasing its estate tax exemption, Costantino said the estimated $600 million fiscal 2023 surplus offered plenty of cushion.

McKee’s office did not respond to multiple inquiries for comment.

Changing Rhode Island’s estate tax is not one of RIPEC’s top legislative priorities. At least for now.

“If they change it in Massachusetts, that would certainly move this up our priority ladder,” DiBiase said.

Nancy Lavin is a staff writer for the Rhode Island Current.

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