Die Free or Leave: Why this should be Virginia's new motto

WALL STREET JOURNAL
THE WESTERN FRONT

BY BRENDAN MINITER

Tomorrow Virginia's Democratic governor, Mark Warner, will be fighting to kill pro-growth tax reform so that his state's death tax might live. His excuse is the war in Iraq. The fight will come when the Virginia General Assembly reconvenes for a one-day session to consider the governor's vetoes. One bill the governor vetoed was a repeal of the state's estate tax. Republicans control the legislature, and this bill--with bipartisan support--passed both houses by a two-thirds majority.

But the bill passed before Mr. Warner took disobedient Democrats to the woodshed -- actually a steak dinner at the governor's mansion. Since then, two senators have reversed their positions. So it is up to the voters--82% of whom supported repealing this tax in a recent poll -- to win over the 27th senator needed to override the governor's veto.

Mr. Warner calls the repeal effort irresponsible in a time of economic sluggishness and war, when military expenses are competing with federal handouts to states. But this mischaracterizes the issue. This fight is over more than the $211 million a year Mr. Warner says the state will lose. It's part of a larger battle that moved to the state capitals after President Bush persuaded Congress to roll back the federal death tax. Mr. Warner's party lost that fight in Washington but is continuing rearguard action in Richmond.

What Mr. Warner is really worried about is losing the political momentum, a particularly frightful prospect because he's constitutionally prohibited for running for a second term in two years. Adding to his woes is that he's already lost one significant tax battle when voters overwhelmingly rejected a tax increase he backed in November. (The referendum would have created two special regions that could charge higher sales taxes than the rest of the state.) After the election, he had to close a $6 billion spending gap by cutting spending, trimming services at the Department of Motor Vehicles and laying off some state workers.

Mr. Warner has managed to scuttle a phase-out of the personal property tax on cars and he's backing a constitutional amendment that would allow governors to serve a second term.





The good news is that the problem the legislators are hoping to fix by repealing the death tax is clear. Virginia is about to lose its attractiveness to people with mobile investment capital--the kind of people who can jumpstart an economy by redirecting their resources. Throughout the 1990s Virginia became a magnet for these people, after two successive Republican governors, George Allen and James Gilmore, fought a seemingly endless battle to cut taxes. But Virginia wasn't alone in tax cuts, so now its relative tax advantage is in jeopardy thanks to a quirk in George Bush's 2001 federal tax reform.
The cost of Virginia's death tax has long been offset by federal tax credits. A taxpayer could subtract $1 he owed to Washington for every dollar paid to a state up to 16% of an estate's value--not coincidentally, the maximum Virginia levy. Mr. Bush is phasing out these credits; by 2005 they will be completely gone. (The federal estate tax itself will linger on until 2010, when it disappears for one year before springing back to full strength.)

This means Richmond will no longer have help in rifling the pockets of the dead. From the taxpayers' perspective, George W. Bush giveth a tax cut and Mark Warner taketh away. It also means that there will be a real economic cost to the state if it keeps its estate tax. That could put a crimp in Virginia's economic recovery. Ron Aucutt, an estate planning expert and partner at the Richmond-based law firm McGuireWoods, underscored the problem at legislative hearings earlier this year by holding up a book titled "Are You Planning a Florida Domicile?"

Florida has long been known as a death-tax haven, but every state that borders Virginia except Maryland (and the District of Columbia) is phasing out its inheritance tax. By 2005 Kentucky, Tennessee, North Carolina and West Virginia as well as nearby Delaware will have killed their death taxes. Virginia residents will run for the borders when they figure out that they can leave a lot more to their children and grandchildren.

Del. Robert Tata, the Republican who pushed this bill through the Virginia House, understands the risk. If this bill doesn't pass, he told me, "we're going to be like Maryland."

Mr. Miniter is assistant editor of OpinionJournal.com. His column appears Tuesdays.