Repeal the State Gift Tax
06/17/2008 | 07:55 PM
Senate Bill 1756
Remarks by Rep. Paul Stam - House Republican Leader
Raleigh: Tuesday, June 17 - The purpose of taxation should be to raise revenue to fund important government services. There are several taxes that are counterproductive to that purpose. One is the vestigial North Carolina gift tax. North Carolina is one of only three states (Connecticut and Tennessee) with a state gift tax (and Connecticut taxes only very large gifts).
While the checks that come in labeled “gift tax” total $18 million dollars/year, this tax actually raises no money. It is a trap for the unwary and serves no socially useful purpose. The Senate has voted to repeal the tax, effective January 1, 2008. I propose the House pass this bill effective for gifts made after July 1, 2009.
1. Without this tax we would receive more money in additional income tax, corporate tax, and other taxes.
I have spoken to CPA’s who had wealthy clients locate to other states in order not to pay our state gift tax. If they had established a residence here, they would have paid more in income tax per year than we collect from the entire state in gift taxes. There is an inordinate waste of time and effort spent in order to avoid the gift tax. Finally, if the transfer is made at death, then the donee has a stepped-up basis. If it is given before death, there is a carry-over income tax basis, and the state receives additional income tax on that appreciation on sale - a substantial offset against the 18 million dollar nominal cost of repeal.
2. This tax is a trap for the unwary. The memorandum from the Gift Tax Subcommittee of the Estate Tax Section of the NC Bar Association gives seven examples of people from North Carolina who pay this tax. There are many financial professionals, including lawyers and CPA’s, who are focused on federal gift and estate tax. They often don’t notice that their clients’ actions have triggered a state gift tax. Lots of taxpayers who give without advice have no clue that they owe this tax until it is too late.
3. There is no social purpose for the gift tax. The origin of the gift tax is a backstop to a death tax. But our death tax has been conformed to the federal law so there is no tax on the first 2 million dollars. Our gift tax allows only $100,000 in lifetime gifts and we are unique and have a different gift tax rate for Class B, and Class C beneficiaries so that the $100,000 lifetime exemption is not available for gifts to siblings and sons of law.
Why would we encourage people to hold onto property until their death to avoid a gift tax? Why? Siblings often want to make gifts to each other to equalize inheritances. Yet this triggers the gift tax without the lifetime exemption.
Existing federal law says that 2010 will be an unusual year. The federal estate and gift unified credit will be unlimited and then go back up to prehistoric rates in 2011. There will be a huge need for tax planning by North Carolina families in 2009-2010. By making the effective date of the bill July 1, 2009 it would be in place for gifts when it is most necessary. There will be no reduction in tax for the gifts that have already been made thus far in 2008, and families planning to make gifts in the latter part of 2009 and in 2010 can do so. Under these circumstances, a real life fiscal note would be zero instead of $18 million for 2009-2010.
Remarks by Rep. Paul Stam - House Republican Leader
Raleigh: Tuesday, June 17 - The purpose of taxation should be to raise revenue to fund important government services. There are several taxes that are counterproductive to that purpose. One is the vestigial North Carolina gift tax. North Carolina is one of only three states (Connecticut and Tennessee) with a state gift tax (and Connecticut taxes only very large gifts).
While the checks that come in labeled “gift tax” total $18 million dollars/year, this tax actually raises no money. It is a trap for the unwary and serves no socially useful purpose. The Senate has voted to repeal the tax, effective January 1, 2008. I propose the House pass this bill effective for gifts made after July 1, 2009.
1. Without this tax we would receive more money in additional income tax, corporate tax, and other taxes.
I have spoken to CPA’s who had wealthy clients locate to other states in order not to pay our state gift tax. If they had established a residence here, they would have paid more in income tax per year than we collect from the entire state in gift taxes. There is an inordinate waste of time and effort spent in order to avoid the gift tax. Finally, if the transfer is made at death, then the donee has a stepped-up basis. If it is given before death, there is a carry-over income tax basis, and the state receives additional income tax on that appreciation on sale - a substantial offset against the 18 million dollar nominal cost of repeal.
2. This tax is a trap for the unwary. The memorandum from the Gift Tax Subcommittee of the Estate Tax Section of the NC Bar Association gives seven examples of people from North Carolina who pay this tax. There are many financial professionals, including lawyers and CPA’s, who are focused on federal gift and estate tax. They often don’t notice that their clients’ actions have triggered a state gift tax. Lots of taxpayers who give without advice have no clue that they owe this tax until it is too late.
3. There is no social purpose for the gift tax. The origin of the gift tax is a backstop to a death tax. But our death tax has been conformed to the federal law so there is no tax on the first 2 million dollars. Our gift tax allows only $100,000 in lifetime gifts and we are unique and have a different gift tax rate for Class B, and Class C beneficiaries so that the $100,000 lifetime exemption is not available for gifts to siblings and sons of law.
Why would we encourage people to hold onto property until their death to avoid a gift tax? Why? Siblings often want to make gifts to each other to equalize inheritances. Yet this triggers the gift tax without the lifetime exemption.
Existing federal law says that 2010 will be an unusual year. The federal estate and gift unified credit will be unlimited and then go back up to prehistoric rates in 2011. There will be a huge need for tax planning by North Carolina families in 2009-2010. By making the effective date of the bill July 1, 2009 it would be in place for gifts when it is most necessary. There will be no reduction in tax for the gifts that have already been made thus far in 2008, and families planning to make gifts in the latter part of 2009 and in 2010 can do so. Under these circumstances, a real life fiscal note would be zero instead of $18 million for 2009-2010.