Kentucky is one of six states that have an inheritance tax. It generates about $50 million in revenue each year by taxing money or property bequeathed to a deceased person’s relatives — though not close relatives like children or a spouse — and others.
Some, including Gov. Matt Bevin, have proposed eliminating the tax. During the race for governor last year, as part of his “Bevin Blueprint” proposal, he said repealing the tax would allow “family members to pass on their businesses and property to their descendants without having part of it taken away by the state government.”
The governor made no mention of repealing the measure or any other taxes during his budget address in January this year, but a legislative committee will be discussing the inheritance tax during a hearing on Friday.
Jim Waters, president of the libertarian-leaning Bluegrass Institute, said that taxing inheritances is “not the way the government should be generating revenue.”
“They’ve already invested the risk and paid the taxes on it during their lifetime, is that really the way to fund our government on the back of people who’ve been successful in that way?” Waters said.
Waters said the inheritances give younger people a “head start in life.”
Children, grandchildren, spouses, brothers, sisters and half-siblings don’t pay the state inheritance tax due to exemptions passed by the legislature in the 1990’s.
Nieces, nephews, half-nieces, half-nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren get a $1,000 exemption, and then are taxed at a rate of 4 percent to 16 percent, depending on the amount of the inheritance.
Jason Bailey, executive director of the left-leaning Kentucky Center for Economic Policy, said that eliminating the tax is “something we shouldn’t even be looking at.”
“Incomes have been growing rapidly at the top while the rest of Kentuckians have seen their wages stagnate and it would just be a big tax break for those who are already benefiting,” Bailey said.
Bailey argues that the poor and middle-income earners are disproportionately affected by taxes and that wealthier people should have to pay a larger share.
According to a 2015 study from the Institute for Taxes and Economic Policy, those who make about $23,000 a year in Kentucky pay 10.6 percent of what they earn in state and local taxes. Meanwhile those earning more than $840,000 — the top 1 percent of earners — pay 6 percent of their incomes in state and local taxes.
The inheritance tax generated nearly $51 million in 2015 and is forecasted to bring in $46 million in 2016 and $47 million in 2017.
Indiana repealed its inheritance tax in 2013 and Tennessee’s will be phased out by the end of 2016.