Indiana’s inheritance tax on chopping block

State legislators looking to phase out or scale back Indiana's inheritance tax, which brings in some $150 million a year, say they would lean on anticipated money from online sales tax collections and growth in other revenues to make up the difference.

Advocates for phasing out the inheritance tax contend it is prompting some wealthy people to move from Indiana to states like Florida that don't have such taxes.

The Indiana House and Senate have approved separate plans reducing the tax. The House plan phases it out completely over 10 years, while the Senate proposal scales it back over five years by increasing the amounts exempted from taxes and cutting the tax rate in half.

Many legislative Republicans have long advocated eliminating the inheritance tax on the grounds that it is unfair to tax money from a person's estate that has already been taxed as personal or business income. A hang-up in recent years has been finding a way to replace that revenue in the state's budget amid declining collections of other taxes during the recession.

Rep. Jeff Thompson, R-Lizton, said the phase-out plan he sponsored would see inheritance tax income decline about $15 million a year—a small piece of the total $14 billion a year the state now collects in various taxes.

"We can handle that," Thompson said. "The growth in revenue will just overshadow that in no time."

The state now exempts from taxes those inheritances of less than $100,000 to children and grandchildren and has a top rate of 10 percent for portions of estates topping $1.5 million to them. More distant family members and non-relatives face higher rates. Spouses pay no state inheritance taxes.

Jeffrey Kolb, an estate planning attorney from Vincennes, has lobbied legislators for years to eliminate the tax. He argues that Indiana has a cumbersome process established in the early 1900s under which people receiving inheritances must file a return through county courts.

He said non-relatives receiving small inheritances sometimes must pay more to file the paperwork than the gift they received.

"It is just an old tax that has long outlived its usefulness and it is very inefficient in collecting the amount of money that it collects," Kolb said.

Critics of repealing the tax say it is a risky move for the state without a guaranteed way of replacing that money in the state budget.

Rep. Ed DeLaney, D-Indianapolis, said eliminating taxes on inheritance wealth for a few thousand people could lead to higher income or sales taxes or cutting programs for millions of Indiana residents.

"We're not being very adult about looking at taxes as a system," DeLaney said. "It's a three-legged stool of taxes on income, wealth and sales. We're sawing off the legs one by one and not looking at what we're doing to the balance of the stool."

A potential revenue boost from increased online sales tax collections has Senate Appropriations Committee Chairman Luke Kenley, R-Noblesville, less concerned about scaling back the inheritance tax.

Kenley said that while he believed congressional action is needed to require internet retailers to collect the sales taxes, more retailers are already voluntarily collecting those taxes.

"I'm hoping that maybe we'll be able to collect enough that we can kind of offset the impact of this loss of revenue to the state," he said.

Sponsors of the bills say they expect to work out a compromise plan ahead of the legislative session's scheduled end by mid-March.

Kenley and others also see eliminating the inheritance tax as a way to keep wealthy people with homes in both Indiana and states like Florida without such taxes from changing their residences to avoid paying it. But there aren't any reliable estimates on how often that happens.

"If it only happens to 10 percent of the cases, that becomes significant," Thompson said. "Maybe it's not so much the inheritance taxes, but other potential income that we lose, from income taxes and sales taxes those folks pay."

DeLaney said more thought should be given to eliminating a longstanding tax so soon after statewide property tax caps were put in place.

 "We're giving up the more stable, if modest, source of revenue and putting more dependence on our more volatile sources," DeLaney said.