State inheritance tax could provide additional revenue


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One of the minor details almost lost among the multifaceted fiscal cliff crisis earlier this year was the increase in federal estate tax by 5 percentage points.

An opinion piece titled “Increase the estate tax to fuel campus diversity” published on Feb. 3 by USA Today College argued that further increasing the federal estate tax could lead to more campus diversity.

The Daily Iowan Editorial Board, acknowledging that the University of Iowa is a state public institution, believes the only way to enact this change for this particular campus is if the state government takes action. The board urges the state to act through the state’s inheritance system to provide more revenue for state education, which could in turn promote diversity on the UI campus.

Distribution of wealth is key to the proliferation, or lack thereof, of diversity among classes on campus. Going to a four-year university, especially the UI — one of the top universities in the state — is more difficult for low-income students.

Though the tax on a person’s inheritance or estate is not directly based on socioeconomic factors, it can still provide necessary tax revenue to allow the state to ease tuition concerns. This is where Iowa’s inheritance tax can provide relief. 

When a person dies, there is generally a transfer of property, be it physical property such as a house, or a sum of money, from an individual to one or many individuals. This property is called an estate, and both the federal and state governments can tax it.

However, there is a subtle but distinct difference between the federal estate tax and Iowa’s inheritance tax.

The federal estate tax sets up a system in which the entirety of a deceased person’s estate is taxed according to a percentage of the amount. Because of the fiscal cliff deal, this tax rose from 35 percent to 40 percent on estates of more than $5.12 million, meaning a deceased’s estate amount to that amount or higher would pay around $2 million to the federal government.

Iowa’s state inheritance tax is distinct in that it does not rely on the whole amount of an estate but on the relationship between the beneficiary and the decedent of the estate.

Kay Arvidson, an assistant public information officer at the Iowa Department of Revenue, wrote in an email that there are different tax rates depending on each individual relationship.

“Iowa taxes the beneficiaries based on their relationship to the decedent and the size of the share of the estate that was received,” Arvidson said. “There is no tax if the beneficiaries are parents, grandparents, great-grandparents, children, stepchildren, grandchildren, great-grandchildren, or other direct lineal descendants.” 

An obvious argument that would increase the amount of tax revenue for the state government would be to switch the entire inheritance-tax system to model the federal estate tax or to tax all estates over a specified amount.

But this solution may not be a solution at all.

The state of Washington has a similar system to the federal government; it taxes the entirety of an estate instead of the beneficiary. In fiscal 2012, its estate tax accounted for approximately 0.7 percent of the entire revenues. This is nearly equal to Iowa’s inheritance-tax revenue, which accounted for slightly more than 1 percent of the tax revenue. The difference between the two is essentially insignificant.

A less revolutionary reform could blossom from Iowa’s only exemption from the inheritance tax — that is if the net of the estate is less than $25,000, pursuant to Iowa Code section 450.10.

If this exemption is modified to encompass estates of $12,500 and over, or eliminated all together, the revenue from the additional revenue could provide some relief to allow the Legislature more leeway when the budget concerns public-university tuition.  

This, in turn, could lead to a further diversification of wealth and more diversity in classrooms around campus.

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