Life After Death Tax? 

The state’s repeal of estate taxes could strike a lethal blow to local communities

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"Absolutely Devastating"

It's long been said that nothing is certain but death and taxes. How about when they're combined? Strenuous debates have erupted across the country about the fairness and efficacy of the estate tax, which is levied by both the federal government and many states on estates over a certain value. Opponents, in an effort to make it all sound more toxic, have rebranded it the "death tax" and say it amounts to double taxation — that those who earned the money should be able to dispense with it as they please.

Estate tax advocates say it helps limit the concentration of wealth in the hands of a few — namely, heirs who didn't earn it.

During his gubernatorial campaign, John Kasich promised to repeal Ohio's estate tax. And he's followed through, introducing it as a plank in his budget. That budget has passed the state House of Representatives and awaits consideration in the Senate.

If the tax is abolished, it will have been a long time coming. Ohio has had some form of death tax since the late 19th century. Under the current structure, established in 1968, estates valued at more than $338,333 are taxed at 6 percent and those over $500,000 at 7 percent. The tax brought in $333.8 million in 2009, with 80 percent of that — nearly $270 million — going back to the cities. The rest goes to the state.

The tax does not apply to estates that pass to a spouse, and there are complicated rules that exempt most family farms.

In 2009, Cuyahoga County collected more than $50 million, second in Ohio only to Hamilton County's $62 million. That's a nice chunk of change, though it's distributed very unevenly. Upscale Pepper Pike, home to only about 6,000 people, averages $1.8 million annually, while sprawling, working-class Parma, with more than 80,000 residents, gets about $1.1 million.

In the last five years, the City of Cleveland's cut has ranged from $2.7 million in 2006 to $6.2 million in 2008 — a great year for dying rich. In 2010, it collected $3.4 million.

Stacked up against those cities' total budgets, it seems like a drop in the bucket — usually 2 or 3 percent. But that bucket has a lot of holes in it these days. Kasich has also slashed state funding to local government and schools in order to balance the state budget, in addition to phasing out a key tax on businesses.

"Coupled with the fact that we're going to be losing so much money for local government funding under this governor's regime, it's going to be absolutely devastating for the entire community," says Kenny Yuko, a state representative whose district includes Euclid, South Euclid, Richmond Heights, and Cleveland's Collinwood neighborhood.

"I've heard several mayors say that if this goes through the Senate as it is, they don't know what they're going to do. It's going to take longer than two years to come out of this economic tsunami we're in. It's a bad mistake with terrible timing."

Another Threat to Safety Forces

Cleveland Heights, like most cities, doesn't budget for the unpredictable amount the death tax brings in. And chances are it won't be closing its community center. But with little to spare, the money fills significant gaps and allows cities to do things they otherwise might not have been able to do, whether it's maintain safety force staffing levels or make infrastructure improvements.

Cleveland Heights' neighbor, Shaker Heights, averages about $3 million a year from the tax. (In 2010, it took in $37.6 million in total revenue.) The death tax there roughly equals the compensation of 30 police officers — nearly half the city's force, according to calculations by Shaker Heights resident Martin R. Kolb, who chaired the city's financial task force and testified recently before the state Senate against repealing the tax.

But it's the wealthiest — and, ironically, often the most conservative and anti-tax — communities that face the biggest quandary. They often collect the most from the tax and expect the highest level of services from their governments.

"Personally, I don't believe in the estate tax," says Westlake Mayor Dennis Clough, a Republican. But he recognizes that his city would be hurting without the $1.6 million the city averages from it annually. While Westlake doesn't include the unpredictable amount in its budget — "we wait until it's in hand," Clough says — it's aided the city in some very visible ways. In recent years, the death tax has helped build a new city hall, as well as a new service garage and improvements to Hilliard Boulevard.

Westlake's finance director, Prashant Shah, says that the city's average take amounts to 8 percent of its overall budget. Although Westlake has a cushion in its reserve fund, Shah worries it could dry up.

"We're already looking to see where we can shave off 8 percent of our budget so we can prepare for the cutback," he says. "We can probably hold out for a few years. If everything else remains the same, it adds up. This city's going to hurt like everyone else."

State Representative Nan Baker, a Republican whose district includes Westlake, Fairview Park, Bay Village, Rocky River, and North Olmsted, admits, "There will be an impact."

"Certainly, it is a concern that [repealing the estate tax] will bring less funding to their cities," she says. "But I think they all understand philosophically that we tax residents their entire life, and we tax them again on their death. I think they understand the importance of eliminating this tax. We're hoping that difference of what they may lose will be made up by what they will gain in revenue if we can keep those people in the city they live in and keep investing and giving generous donations to different charities."

Yuko, Baker's Democratic colleague, also opposes the estate tax — in theory.

"It's not that I'm against repealing the estate tax, but I'm definitely against repealing it right now," he says. "It's money that some people want to leave to families. It's money they've earned for their lifetime of hard work. I realize we all pay taxes in life for a myriad of reasons, and this is another. If we were in a position where we could repeal it and be fiscally responsible, I would support it. But now we need to give local government every opportunity to survive — not thrive."

Eliminating the tax now, he adds, "will be absolutely devastating on all four corners of my House district. The City of Euclid, my largest city, they're facing a cut of about $1.2 million. Most of that money is being used for safety forces, such as police and fire."

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