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The North Carolina Gift Tax:
The Gift that Keeps on Taking
By Jay Hemphill
A few years ago there
was an internet fable about a thief who lost money robbing a convenience
store. In the story, the aspiring criminal shopped for a few items
before proceeding to the register to check out. The thief placed his
items and a fifty dollar bill on the counter to pay for them. When the
clerk opened the register, the thief pulled out a gun and demanded all
the money. The clerk handed over the entire contents of the register,
which totaled less than forty dollars in cash. The thief fled the store
without counting the money but left his own fifty dollar bill on the
counter, thereby incurring a net loss for his effort.
The State of North Carolina finds
itself similarly situated in the levy of its gift tax, at least at the
bottom line (no moral equivalency between the activities is being drawn;
readers are left to their own conclusions). Typically, a tax imposed by
a government should leave that government with more revenue than before
the tax was paid. This desired result is not achieved by the North Carolina gift tax,
which like the attempted robbery, almost certainly leaves the State with
less revenue then would otherwise be collected without it.
Perhaps drawing on the experience
of the forty-six other states operating without a gift tax of any kind
(including tax-happy California), the Revenue Laws Study Committee
of the General Assembly is currently reviewing the gift tax for reform.
Alternatives to the current system range from outright repeal to
conforming the
North Carolina gift tax (originally passed in
1939) to the modern
United States gift tax. This article
provides an overview of the gift tax and examines its negative effects
to highlight the need for reform. Individuals should consult their own
tax advisors as the applicability of the tax to their situations.
Overview of the
Gift Tax. The
North Carolina gift tax is an excise tax on
gifts of North Carolina
property made during the lifetime of the donor. Subject to limited
exceptions, the tax is imposed on amounts transferred to a person (other
than a spouse) in excess of twelve thousand dollars in a single calendar
year. The rates vary depending on the amount of the gift and the
relationship between the donor and the recipient. For example, money
given by a parent to a child is taxed at rates between 1% and 12%, while
money transferred between siblings is taxed between 4% and 16%.
Unlike the one million dollar
exemption allowed under the federal gift tax, North Carolina law only
allows a one hundred thousand dollar lifetime exemption, and limits that
exemption to certain family members (lineal ancestors, lineal
descendents, adopted children and stepchildren). The full tax rates are
set forth in N.C. Gen. Stat. § 105-188.
Like other excise taxes, the gift
tax is levied on a particular behavior, in this case the decision to
give away property. Examples of other behaviors subject to excise taxes
include the decision to buy tobacco, the decision to buy a car and the
decision to die. The estate tax (a close cousin of the gift tax) is
levied on passing property in conjunction with the voluntary act of
dying, regardless of the cause of death.
The
Revenue-Negative Effect. A March 5, 2008 study by the
Research Division of the General Assembly estimates the gift tax
generates approximately eighteen million dollars in revenue annually.
The Gift Tax Subcommittee of the North Carolina Bar Association notes
that this gross total is offset by substantial sum of money that the tax
costs the State in other areas. The Subcommittee indicates the gift tax
is a factor in deterring people from other states from retiring in
North Carolina. Despite the high quality of
life in North Carolina, wealthy individuals may opt to
retire in one of the other forty-six states without a gift tax of any
kind. Wealthy native North Carolinians may choose to join their friends
by retiring in second homes in South Carolina,
Florida or California, rather than stay in North Carolina and incur
a voluntary tax. There is no way to estimate the millions of dollars in
forfeited jobs this State loses when retirees and their demand for
housing, healthcare, recreation and other services leave the State.
Further, North Carolina loses the
ability to levy its income and subsequent estate taxes on
those retirees’ assets. That the State would willingly put itself at a
competitive disadvantage in attracting retirees (and the millions of
dollars in jobs and taxes they bring with them) for less than twenty
million dollars a year is short-sighted at best.
The gift tax
discourages people from transmitting property to their children. Wealth
is then “trapped” in the hands of the older family members until their
deaths, which removes property out of circulation from the State’s
economy. The net effect is a barrier to investment and consumption that
exacerbates the forfeited income tax revenues.
The Double Taxation Effect.
Every dollar subject to the gift tax was previously taxed by the
involuntary income tax when earned. The assets remaining after the gift
tax is imposed will be taxed for a third time by the sales tax when
spent, and potentially a fourth time if a property tax is imposed on the
particular item purchased. Students of the American Revolution should
be forgiven when they inquire about double representation in exchange
for this double taxation.
Impact on Farmers
and Family Owned Businesses. Supporters of the estate and gift
taxes rely on the perception that only “wealthy” people pay estate and
gift taxes. This perception must seem strange to the small farmers and
family business owners who are trying to transfer interests in land and
property to their children while they are still alive to provide
consulting and guidance to the new management. The gift tax is
especially hard on lower to middle income families transferring farms or
small businesses without sufficient liquidity to pay the resulting gift
tax.
By repealing its
confiscatory gift tax, North
Carolina would relieve itself of its voluntarily
incurred barrier to attracting retirees and would expand its income and
estate tax bases. A repeal of the gift tax would enable small farmers
and family owned businesses to transmit ownership and control during
their lifetimes when they can provide operational consulting and
guidance to the younger generation. Finally, there are both fairness
and wisdom issues to a double tax that actually loses money for the
State when levied. The General Assembly should take a lesson from the
would-be thief: there are some activities that are just not worth the
trouble.
Mr. Hemphill is an
attorney at Ragsdale Liggett PLLC practicing in the area of wills,
trusts and estates.
Editor’s Note: Subsequent to the
writing of this article there appeared to be progress in a repeal
of the gift tax. Please see
the following link for more details,
http://www.newsobserver.com/news/story/1122064.html.
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