Mamdani’s NY Estate Tax Exemption Should Target Dynastic Wealth

New York City Mayor Zohran Mamdani’s reported plan to slash the state’s estate tax exemption threshold to $750,000 highlights a real problem—the US under-taxes inherited wealth. And the plan has triggered a familiar round of backlash.

Beneath the reflexive outrage to an admittedly flawed plan lies a central tension: Why does the tax code treat inherited wealth more generously than income earned through work?

We tax work much more consistently than we tax accumulated wealth, so Mamdani is right to focus on that imbalance. But the way his solution is structured risks hitting middle-class homeowners and small businesses rather than just people with a lot of inherited wealth. If New York wants to target dynastic wealth, it should do so directly with a system calibrated to large fortunes, not one that trips over brownstones and family businesses along the way.

For all the energy devoted to calculating and paying taxes owed on income, the federal and state tax systems are much more generous when it comes to wealth that is passed down. Wages are taxed annually, often at progressive rates, while inherited assets frequently receive preferential tax treatment—take the step-up in basis, which allows decades of capital gains to disappear the moment an asset holder dies.

For the tax code to combat long-term inequity, or even just ensure basic tax fairness, it must confront intergenerational wealth transfer. Estate taxes, for all their “death tax” political baggage, are one of the few tools that exist to address it.

Because estate taxes only apply at death, unlike income taxes, the behavioral responses are more limited. You pretty much just have to ensure you don’t die within state lines.

But this can encourage exactly the kind of tax avoidance and migration that critics warn about. So how do you tax inherited wealth without undermining the tax base in the process?

Estate taxes can help limit the accumulation of inherited wealth; they just need to be properly calibrated.

Photographer: Michael Nagle/Bloomberg via Getty Images

Ideas like Mamdani’s often prompt responses such as, “If you raise taxes on wealthy households, they’ll leave.” There may be some truth to that concern, particularly at the state level and in the context of an estate tax, where high earners approaching retirement have the means and the incentive to pull up stakes for more Floridian pastures.

But the threshold itself is the most immediate defect in Mamdani’s plan. At $750,000, the estate tax would almost certainly reach far below the wealth tier it wants to target and into a much broader group of households whose primary asset may be housing. In New York City, even modest homes easily exceed that value.

If the policy isn’t properly cabined and limited, the tax could mostly affect asset-rich, cash-poor households who may have little immediate liquidity to meet the liability. And a policy solution that treats a Brooklyn brownstone and a nine-figure financial portfolio as equally problematic is a tough sell politically.

Even setting the threshold aside, New York’s current estate tax law has a built-in flaw that would be exacerbated by any expansion. Estates just below the exemption owe nothing, while those that exceed it by a modest margin can lose the entire exemption—triggering taxes on the full value of the estate, not just the overage.

This adds a sudden, dramatic jump in liability that isn’t tied to any underlying jump in ability to pay. It creates strong incentives for expensive estate planning, as households seek to restructure assets to stay below an arbitrary line—and any cost below the estate tax cost has a positive return on investment. These activities may be rational for the taxpayer, but generate little real economic value in the social sense.

A low threshold, combined with a cliff, risks falling heavily on illiquid estates that can’t afford necessary planning to avoid a higher tax bill. This could prompt the sale of assets that were never otherwise intended to be liquidated. Such an outcome is both economically inefficient and politically unsustainable.

None of this calls for abandoning Mamdani’s basic idea, which gets more right than wrong. If anything, it suggests that estate taxes can help limit the accumulation of inherited wealth; they just need to be properly calibrated. That means lowering the exemption more modestly—probably into the low millions rather than hundreds of thousands—while eliminating the estate tax cliff that distorts behavior.

That last bit is key. The system should be predictable and internally consistent. Small changes in estate value shouldn’t produce wildly different tax outcomes. A tax that is smooth and transparent isn’t just easier to administer; it’s harder to game and more likely to be viewed as legitimate by the public subject to it.

Policymakers should recognize the difference between liquid financial wealth and illiquid assets by allowing for deferrals or special treatment for primary residences and closely held businesses. The bulk of the revenue, instead, should come from higher marginal rates on very large estates—those in the tens of millions—where intergenerational wealth concentration is more pronounced.

The temptation in debates such as these is to treat the issue as a binary—estate taxes are either obviously necessary or obviously destructive. Mamdani’s plan shows why both absolutes miss the mark.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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