[S]OUTH BURLINGTON — Gov. Peter Shumlin signed into law Thursday changes to the Vermont estate tax that are designed to keep wealthier residents from leaving for tax-friendlier locales and make it easier for small business owners to pass their companies on to the next generation.
The governor signed the bill at Leonardo’s Pizza in South Burlington. The family-run business with three outlets was started in Burlington in 1990 by Phil George. Day-to-day operations are run by his daughter and son-in-law, Sara and Kelly Byers. There are about 100 full-time and part-time employees, and the family hopes to franchise the parlors in Northeastern states.
When a person dies, the first $2.75 million of his or her assets can be passed on tax-free. Under the new law, the estate tax will be applied only to assets above that amount. In the past, once an estate went over the limit, the tax was applied to its entirety, including the first $2.75 million.
Shumlin called that old system fundamentally flawed and said that, based on what accountants had told him, it was the single biggest reason older Vermonters moved to Florida, one of 30 states with no estate tax. Shumlin and Tax Commissioner Mary Peterson said it could cost taxpayers tens of thousands of dollars more when they had to pay tax starting at the first dollar.
“The current system could not have been more unfair,” Shumlin said, noting there was no other tax system in the country that reached back to the first dollar once an estate had passed an exempted amount.
“It needed to be fixed for a long time,” he said.
Sen. Ginny Lyons, D-Chittenden, the sponsor of the bill, said it took several sessions to get it through. Shumlin said lawmakers complained it was hard to make the change when there were budget pressures.
Lake Champlain Regional Chamber of Commerce President Tom Torti and Lyons said there was a misperception the estate tax applied only to wealthy people and that those in the middle class were not sympathetic to changing the law.
“It will help keep some of the folks in the state who are slightly more affluent,” Lyons said. Several speakers said the state exemption should be raised to the same level as the federal government exemption, $5.45 million. (The federal estate tax gives a couple a unified exemption of $10.9 million.)
The speakers noted that assets include real estate and that through appreciation, many middle class Vermonters have assets approaching or exceeding the exemption caps, including farmers and small business owners.
Only about 30 estates a year pay taxes to Vermont, according to a report by the Blue Ribbon Tax Structure Commission.
Before serving up slices of pepperoni and also goat cheese and honey, Sara Byers told the crowd at the event that there were often insurmountable financial obstacles to handing down a family business. Frequently the next generation is forced to sell the business — or perhaps just a slice — to pay the estate tax bill.
“This bill helps remove some of those obstacles, ensuring that family businesses remain alive and well in Vermont,” she said.
She said carrying on her father’s tradition was one of the biggest honors of her life. But she has had nagging questions about whether Leonardo’s could survive financially after her father’s death, and she said this change to the estate tax will help.
Julia Birnn Fields, of Birnn Chocolates of Vermont, said the change could help younger Vermonters stay in the state to run their family business.
Under the old law, Shumlin said, Vermonters could pay a rate as high as 40 percent on part of an estate. Under the new law, the rate is capped at 16 percent.
“This begins to fix that problem,” Shumlin said. “Keeping people in Vermont, paying taxes, growing old in the greatest state in the nation to grow old, and this is going to help not drive senior citizens out of the state, along with small business people as well.”
In addition to the two Vermont locations, Leonardo’s has an outlet in Portland, Maine.
