Rarity BayPosted: 13 Jul 2012 08:22 PM PDT

In our last blog post, regarding no-state-income tax states, we told our readers one of the states – Tennessee – had an inheritance tax ranging from 5.5% to 9.5%.

However, on May 21, 2012, Tennessee Gov. Bill Haslam signed into a law a Republican-led measure phasing out the inheritance tax – and cutting the state’s sales tax on food by one-quarter of a cent. (Tennessee is one of a handful of states that taxes grocery food, and local taxing authorities add as much as 2.75% to that tax.)

The inheritance tax bill’s sponsor, Rep. Charles Sargent, R-Franklin, argued that it would soon generate more tax revenue than brought in by the tax, because those with large inheritances would spend more on taxed items and services. He added that the new law will make the state one where people will come, and want to stay when they retire.  State Sen. Mark Norris, R-Collierville, dubbed it the “Family Farm Preservation Act,” because he felt it would encourage farmers to hold onto their properties.

The inheritance tax will be history by 2016. Until then, the exemption increases to $2 million in 2014, $5 million in 2015, then disappears in 2016. According to the Chattanooga Times Free Press, it will cost the state an estimated $94.6 million annually.

Hani Sarji, an attorney who focuses on tax law and estate planning in New York, wrote in the June 30, 2012 edition of Forbes that the tax cuts were designed “to keep wealthy retirees in the state of Tennessee and to woo others, adding that Tennessee lawmakers also repealed the gift tax retroactive to January 1, 2012. Sarji also writes that “Although Tennessee’s death tax is called an ‘inheritance tax,’ it operates as an ‘estate tax.’ An inheritance tax is an excise tax upon the privilege of inheriting property, and it is paid by each beneficiary. In contrast, an estate tax is an excise tax imposed on the privilege of transferring wealth, and it is paid by the decedent’s estate.”

Sarji continues: “Quite simply, Tennessee’s gift and estate tax (was) the single greatest reason why wealthy people don’t want to live in Tennessee. Many leave the state and few (wealthy) move into Tennessee. They take all their jobs, entrepreneurship, spending, homes and wealth with them. This (was) the single greatest detriment to Tennessee’s growth and Tennessee’s ability to raise sufficient tax revenues,” and he argued that the elimination of Tennessee’s gift and estate tax will in fact, increase state tax revenues.

And, despite Democratic efforts to lower the state’s sales tax on grocery food from 5.5% to 5%, Republicans said they didn’t want to give away the farm, so both sides agreed to the 1/4% cut – for now. Gov. Haslam liked the original proposal, and said he’ll propose another quarter-penny cut next year.

It looks like Tennessee lawmakers are smart enough to think what will be best for their state long-term.  As more retirees examine what different states offer, coupled with the natural beauty much of Tennessee offers, this new tax repeal will be yet another reason for Baby Boomers to give the Volunteer State strong consideration for their retirement relocation.

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