Maybe the Virgin Islands should offer wealthy older Americans a remarkable deal — live in the territory and file your estate tax here, and the V.I. government will give your heirs a 2 percent rebate on their federal estate taxes.
You leave an estate of, say, of $2 million to $3 million, the federal tax comes to, say, $500,000, and your heirs would get back $10,000 from the island government. (These numbers are approximations, but you get the idea.)
This is attractive for three reasons:
* Such a scheme would encourage more wealthy people to settle in the territory.
* It would not raise taxes for the estate, or any other Virgin Islands interest group.
* It would bring additional money, maybe millions of dollars a year, to the sore-pressed territorial treasury.
Sound too good to be true? It is not. It would simply take a little imagination on the part of the legislature. The proposed inheritance tax is in keeping with federal law.
Most of the 50 states, but few of the U.S. island possessions, have taken advantage of an obscure part of the federal code. If a state or territory wants to impose an estate tax on local estates, it can do so without increasing costs to the estate. If it passes the right kind of estate tax, a share of the federal estate tax comes to the jurisdiction. So it is the U.S. Treasury, not the estate, that provides the money.
Strange, but true. States passing what are called credit estate tax laws can levy up to 16 percent on the value of estates and have the taxes so levied deducted dollar for dollar from the federal estate tax.
I do not have hard information on what the local results would be, but in a year in which some wealthy people died, it should bring millions to the V.I. government.
The new and, I think, unexplored angle is the suggested estate tax rebate, which could be used to encourage more well-to-do mainlanders to settle in the islands. The notion is a simple one — the Virgin Islands would take a small part of the windfall that it would collect by passing the credit estate tax, and return it to the heirs of substantial estates. The V.I. treasury would lose nothing out of pocket, as it would be rebating money collected from the new territorial estate tax, and it would create an interesting, new pitch to use seeking to lure more well-to-do mainlanders to spend their golden years in the islands.
Might the U.S. Treasury Department object and seek to change the law to prevent the proposed negative estate tax? Well, maybe, but let me tell a little story about how the Treasury Department reacted to a somewhat similar maneuver a few years ago in the U.S. Commonwealth of the Northern Mariana Islands in the Pacific. The local government discovered after the death of a colorful and wildly successful resident, mainlander Larry Hillbloom (the "H" in the DHL parcel delivery service), that he had left an estate worth about half a billion dollars.
They also noticed that they would not get a nickel from the estate taxes, because the Marianas had not passed a credit estate tax; so, the Marianas legislature passed one retroactively — and picked up several million dollars as a result. U.S. Treasury officials knew what was happening but did not think it worth while to sue the Marianas over the matter.
So, the chances are that the U.S. Treasury would not bother itself to object to the proposed negative estate tax in the USVI either, even if it had grounds to do so, which I doubt (but then I am not a tax lawyer).
The territory could copy what the Marianas did and pass a credit estate tax law retroactively, and hope to gain some additional taxes in this way — again, not from taxpayers, but from the feds.
So I am suggesting three estate tax alternatives:
1. Simply pass an estate credit tax bill prospectively, and get money from a new source.
2. Pass such a bill and add the 2 percent rebate offer.
3. Pass such a bill and make it retroactive.
In addition to exploring one-off fiscal maneuvers (like trying to borrow its way out of debt, and working out exotic tax arrangements with publishers and athletes), the V.I. government might also focus on run-of-the-mill but solid ways of increasing its tax revenues on a sustained basis, such as the increased rum tax rebate provided by the Clinton administration, and one of the estate tax programs described above.
Editor's note: David North, a former assistant to the U.S. Secretary of Labor, chairs the Board of Tax Appeals in Arlington County, Virginia.