Oklahoma's Death Tax Not O.K.

May 2000 No. 00-1

OCPA Policy Paper A Report from the Oklahoma Council of Public Affairs

Oklahoma’s Death Tax: Not O.K.

by Edward J. McCaffery Maurice Jones Jr. Professor of Law, University of Southern California Law School and Professor of Law and Economics, California Institute of Technology

Executive Summary The United States are almost united on one point — states should not go over and above the federal death tax and impose additional burdens on some of their most economically productive citizens. As more and more states drop the unwise and unfair policy of having their own provincial death taxes, the argument against these levies becomes more and more compelling. Oklahoma now stands almost alone in having a state-level estate tax. It raises little revenue in gross, and could well lose money on net. It is complicated, inefficient, and unfair. From almost any point of view, the message is clear: Oklahoma should get with the times and drop its death tax.

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Introduction death tax forces thousands of people to fill out Federal law allows a so-called pick-up tax that forms every year, and keeps a state bureaucracy piggybacks on the federal death tax, generating employed where none is needed. As it becomes revenue for states without increasing the total more prominent—both because of the moves of death tax burdens on their citizens.1 There is no almost all other states towards pick-up status, and very good reason not to have a pick-up tax; the because of the federal effort to reduce or repeal the money is there for the taking, a result of the unwise death tax, lock, stock and barrel—there will be ever and unfair federal death tax. It doesn’t hurt anymore reason for individual Oklahomans to take one—except possibly for one’s distant Uncle Sam— steps to avoid the adverse effects of the tax. for a state to have a pick-up tax. But going beyond Is this concern mere paranoia or some kind of a pick-up subjects the survivors of certain economi“supply-side” fear? Hardly. Forbes ran an article in cally productive citizens to additional stress and June, 1999, titled “Death Traps” and subtitled “You expense at the grave site. It is not a good idea. can’t beat the Grim Reaper. But you can outrun the Proof of the wisdom of pick-up taxation is that state tax collector.” The article featured a large even New York, of all states, recently abolished its color-coded map, clearly showing Oklahoma’s 2 estate tax and adopted a pick-up tax. All of status as a death tax state surrounded by nonOklahoma’s neighboring states have nothing other death tax neighbors.7 Following the publication of than a pick-up tax. Thirty-six states in all do likethe Forbes article, New York got with the times, wise, having just a pick-up tax.3 Only three states— abolished its own death tax, and became a pick-up Oklahoma state. A main joined by Missisreason motivatsippi and ing the New York Ohio—have an legislature was I happen to be a life-long Democrat, and estate tax going fear of emigraa liberal one at that. I’m interested in tax over and above tion to Florida, the federal law because I strongly believe that one of the freebie. Oklaenlightened getting principles of taxation down right homa is increasmajority. Similar is a fundamental matter of social justice. ingly isolated in concerns had going beyond swayed Massathe pick-up and chusetts years imposing additional death taxes on some of its before. Louisiana and Connecticut have also since citizens. gotten with the times, repealing their separate stateIt’s even worse than that. The Oklahoma death level inheritance taxes effective in the next few years.8 tax only applies to some decedents, and it’s a This will bring the no-separate-death-tax crowd to 38 rather odd lot indeed. states.

It turns out that the Oklahoma death tax has long What, exactly, might an Oklahoman do to avoid the been out of synch with its federal cousin.4 In 1998, dreaded death tax? The best ways to avoid the the Oklahoma Legislature passed long-overdue Oklahoma death tax are to spend all of one’s wealth, legislation to bring the exemption level under the move to almost any other state, get more money, or state death tax in line with the federal exemption give everything away to one’s kids. It’s hardly sensible level—eventually.5 By 2006, when both the new tax policy to encourage and reward such activities, state and federal exemption levels are fully phased especially dying broke or leaving the state, while in, Oklahoman decedents leaving their estates to punishing the seemingly randomly chosen group of spouses or lineal descendants will face no effective moderately wealthy decedents with no lineal descenadditional state-level tax—though they may still dants. have to complete forms and deal with arcane Abolishing its own death tax and moving to pickdifferences in the two taxing regimes. But this still up status would cost Oklahoma, in the first inleaves, bizarrely enough, those having any sized stance, no more than $40 million a year.9 This may estate whatsoever but no lineal descendants to pay sound like a lot of money to some, but it is well an additional state-level tax.6 under one percent of the total state budget of $5.7 It’s still worse than that. The separate Oklahoma billion.10 Worse, if almost any of the incentives

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gests that states might want to shore up their own generated by the perverse tax become real, the state-level death taxes, a more reasoned appraisal “supra pickup tax” that Oklahoma now has could suggests just the opposite course of action. Were well cost the state money. If a handful of moderthe federal government to reduce or repeal altoately wealthy Oklahomans move to Texas or some gether its own death tax, the handful of states other state to avoid the tax, the state loses ongoing having their own death taxes would only stand out income and sales taxes, along with even the pickall the more. Oklahomans who may not actually up amount that the federal government is prepared leave the state to save tens of thousands would now to give it, gratis, on account of these citizens. This be confronted with tax savings in the hundreds of logic has persuaded legislatures in tax-hungry thousands. Articles like the Forbes piece from June, states like New York and Massachusetts to aban1999, would be sure to don their death taxes follow. The already bad — for the sake of Oklahoma Surrounded by situation would only get money, if not morality.11 Estate-Friendly States worse. All of this sugIt’s time to stop the gests that state-level insanity. There is no officials listen to the good reason for perCO more general case sisting in a death tax MO Estate-Friendly KS Estateagainst death taxes, over and above the Estate-Friendly Friendly and learn to wean pick-up. The Oklahoma themselves from this state-level death tax is OKLAHOMA NM AR misguided tax. complicated, unfair, Not EstateEstateBefore proceeding to inefficient, and raises Good Friendly Friendly a quick overview of the little money by any federal death tax and account. The odds of the case against it, I its losing money, all TX Almost Heaven would like to interject a things considered, are personal note. I happen high. Worst of all, one to be a life-long Demoshould think, whatever crat, and a liberal one money it does raise is at that. I was born and dirty money—sucked raised in New Jersey, from the deathbeds of educated in public those unfortunate, Estate-Friendly: ”States with no death or inheritance taxes.” schools and then Yale wealthy but not too Almost Heaven: ”States with no death or inheritance taxes and Harvard. I became wealthy, Oklahomans and no personal income or capital gains taxes. Die here!” interested in tax law, as who have had the Not Good: “States that impose an inheritance or death tax.”

I remain to this day, misfortune not to be Source: Forbes, June 14, 1999 because I strongly passing their wealth on believe that getting to their lineal descenprinciples of taxation down right is a fundamental dants. In a world of nutty taxes, such a state-level matter of social justice. As a young and liberal law death tax might be the nuttiest.

Federal Death Taxes: A Bad Idea professor, thinking these thoughts, I decided to look The federal death tax is itself a bad idea. Underinto the gift and estate tax, believing that there standing how the tax works and what’s wrong with must be some way to strengthen this important it are relevant to the case against state death taxes public policy tool. This was to be my first scholarly for two reasons. project.

One, the basic inefficiency and immorality of death Some time later I came to the realization that I taxes strongly suggests that states should not add was blind, but now can see. Years of thinking and their own insults and injury to the federally imposed research led me to the surprising conclusion that harm. the federal gift and estate tax—the death tax—was Two, it is important to understand that the case a bad tax, even (and maybe especially) on liberal against the federal death tax is a strong one that is grounds. Let me summarize this research quickly, gaining steam. While on the one hand this sugfor it sets the stage for understanding what is

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top rate bracket reached 77 percent under the wrong with the Oklahoma death tax.

The Nature of the Beast death tax. From 1942 to 1976, there was very little America has had a death tax of some form since change in the gift or death taxes. Death taxes were 1916, the first year that the modern personal inimposed on transfers occurring at death; gift taxes come tax was put in place. Before then, there were were imposed on transfers made during a scattered periods when federal taxes were imposed taxpayer’s life. Under the Tax Reform Act of 1976, on the receipt, rather than the transfer, of property. the estate and gift tax structures were combined In 1894, for example, gifts, bequests, and inheritinto a single unified gift and estate tax system, ances were included in taxable income. One year which can be seen as a wealth transfer tax. It later, in Pollock v. Farmer’s Loan & Trust Co.,12 the applies to the cumulative taxable transfers made Supreme Court invalidated the income tax as by a taxpayer during life or at death. unconstitutional under Article I, Section 9 of the There are several large exceptions and excluConstitution, which prohibits any “direct” tax withsions to the federal death tax that mean that most out apportionment among the citizens of the variAmericans never have to worry much about it. Only ous states. After the Sixteenth Amendment became one to two percent of people who die in this country effective in 1913, Congress reinstated the federal each year leave enough wealth behind to generate income tax, but chose to exclude gifts, bequests any death tax at all. The tax contributes a rather and inheritances from taxable income, hence the small part—about one percent—of all federal perceived need for a separate death tax. The revenues. At least since World War II, when both the constitutionality of income tax and the the tax was upheld federal payroll tax in New York Trust Co. system began to v. Eisner,13 where the gather steam, the The separate Oklahoma death tax Court held that the death tax has never forces thousands of people to fill death tax was a tax been a significant on the transfer of out forms every year, and keeps a revenue-raiser, rarely property, not on its accounting for more state bureaucracy employed ownership, and so than two percent of where none is needed. was an “indirect” tax total federal receipts. that need not be Its significance has apportioned under remained extremely the Constitution. limited in recent A federal gift tax was first enacted in 1924. This times, generally around the one percent level. tax was designed to complement the income and Nonetheless, for people wealthy enough to be death taxes by taxing transfers that would reduce concerned about it, the death tax can be a steep either or both the donor’s taxable estate or future tax indeed. It starts in—after the exemption or “zero taxable income. It was especially important to bracket” level, to be discussed below—at an effecprevent a wealthy person from avoiding the death tive rate of 37 percent and quickly reaches a flat 55 tax by making gifts on his or her deathbed—a percent rate. A small percentage of taxable estates situation awkwardly policed by rules governing end up paying a large percentage of the total taxes gifts in anticipation of death. As originally enacted, collected. When the death tax was first imposed, the gift tax was ineffective because it was comthe tax was targeted at the rich, with rates ranging puted on an annual basis, without regard to gifts from one to 10 percent. Even so, it was an unpopumade in prior years. As such, a donor’s first gift lar tax, which played into the pick-up story to be each year was subject to the bottom rate bracket in discussed below. Times changed during World War the progressive system. That gift tax was repealed in II, however, as the war needs led to massive in1926 and then permanently revived in 1932, with the creases in all forms of federal taxation. The maxitax rates based on the donor’s cumulative taxable mum death tax rate increased to 77 percent in 1941. gifts rather than just those made in the particular Things have a way of lingering long beyond the year. reason for them has passed, and, after the Tax Rates were increased under both the gift and Reform Act of 1976, the estate and gift tax rates death tax fairly frequently through 1941, when the ranged from 18 percent to 70 percent. Today, the

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death tax ranges from 37 percent to 55 percent.

Then and only then would a death tax be paid, at There are three major exceptions and exclusions the steep rates noted above. to the tax that go a fair way towards explaining its There are many other special provisions that limited yield: relate to such things as charitable contributions; 1. Gifts or bequests left to a spouse are typically not payments for tuition and medical expenses; the 14 taxable, under the so-called marital deduction. taxation of trusts; ownership of farms and small There are numerous complexities in this spousal family-held businesses; life insurance, and so on. deduction, nearly all of them unfortunate. But the The death tax system is enormously complicated. It bottom line is that most married couples do not has fueled a well-paid cottage industry of death tax pay any death tax until both of them have died. lawyers and planners. But we know enough now to 2. Each person has a cumulative lifetime exemption get a sense of what is basically wrong with this level before any tax is due—this is the “zero death tax, especially since outright repeal turns out bracket” of the death tax. The unified credit to be by far the best option for fixing it. amount, as it is called, became $600,000 in 1981; The Tragedy of the Lears Congress agreed to raise it to $1,000,000 over a Sometimes a story is worth a thousand or so series of years, beginning in 1997 and ending in academic words—or is at least more fun to read. I 2006. A husband and wife, with careful planning, have been pressing an argument for many years, in can combine their lifetime exemption amounts so many venues across the country, that the federal that a married couple can leave $2,000,000 to death tax is a bad tax because it is an “anti-sin” or their children, tax-free. a “virtue” tax—it falls on just those activities we 3. In addition to this $1,000,000 benefit, there is an should want our most economically productive “annual exclucitizens to be sion amount” doing. A simple of $10,000.15 fictional tale gets Why should the frugal and thrifty be This can be the main points given per across perfectly taxed while the spendthrifts who live donor, per well. luxuriously are not? donee, per King Lear and year—all his wife have without countthree daughters, ing against the $1,000,000 lifetime exemption.

Regan, Goneril, and Cordelia. The Lears are Once again a husband and wife can combine wealthy and well advised. Every year, they give their amounts. So a married couple can give each daughter the full $20,000 that the law allows $20,000 to each of their children each year, them to give, tax-free. It is a fairly simple matter to without incurring any tax or subtracting from put this money into trusts, so that the daughters their lifetime exemption amounts. The popular cannot spend it imprudently. Over time, this can get “Crummey” trust device, among others, allows to be a big deal indeed. this annual exclusion amount to be used even for Invested in the stock market at its historic 10 16 transfers into trust. percent rate of return, each daughter would have The basic operation of the death tax is easy over one million dollars ($1,000,000) by the time she enough to state. When a person dies, the governreached age 20, over three million ($3,000,000) by ment adds up all of the assets in her estate at their age 30, and nearly nine million ($9,000,000) by age then-fair-market value. It next adds in the value of 40. No taxes need be paid. The Lear daughters can any taxable gifts she made during her life—that is easily manipulate tensions within the income tax with gifts over and above the annual exclusion amounts. their wealth—investing in non-income producing Finally, the government subtracts debts. If all of that assets or tax-exempt bonds, for example—and so comes out to less than $1 million (using the fully they need never pay any income, payroll, or any other phased-in 2006 values)—as it would for the vast kind of tax. Nor need they ever work a day in their majority of American decedents—there are no lives. further questions. If the decedent’s estate is worth It can get worse. Suppose that the Lears decided more than $1 million, the government next subtracts to endow their favorite daughter, Cordelia, with out any qualified transfers to a surviving spouse. their full exemption amount, two million dollars

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($2,000,000), at the time of her birth. Very wealthy taxes, payroll taxes, and other expenses of the Americans, like H. Ross Perot or Bill Gates, can working world. When Goneril later marries, the easily afford to do the same. Supplemented with family lives off of her husband’s income, while the $20,000 annual gifts, Cordelia would have a Goneril’s “trust money”—as she calls it—continues personal fortune of almost one hundred million to subsidize her personal spending habits. Goneril dollars ($100,000,000) by her fortieth birthday. She outlives her husband and spends all of her inheritcould live happily ever after at a spending level of ance from him, too. When she dies, broke, her three ten million dollars ($10,000,000) or so a year — all children inherit nothing. In this scenario, Goneril, without ever paying a penny to her (distant) Uncle like her elder sister Regan, never pays any federal Sam. taxes—no income, no social security, no gift or The current income-plus-death tax with all of its death taxes—on account of her own work or savloopholes and flaws—a tax built up and defended ings. Indeed, she has never worked for pay or in the name of fairness—allows and even encoursaved anything in her life, which has been spent in ages this sort of thing. It’s a travesty, at least, if not a steady pattern of dissaving her father’s and her a tragedy. Not only is the current death tax so husband’s money. porous as to call Cordelia, the its claim to fairyoungest daughness into quester, follows a There is no reason save inertia why tion, it also falls— different route.

Oklahoma should not adopt a pick-up when it falls at She puts her one all—on the wrong million dollars policy. Its current death tax is archaic, parties. Let’s look ($1,000,000) into complicated, inefficient, possibly at the possibly an investment divergent fates of account, prucostly — and perhaps even more the Lear daughdently managed immoral than the federal death tax, as ters, in terms of in stock funds. more arbitrary. It is time to kill it. their choices of She vows to how to live and in withdraw some of terms of how her capital only if much taxes they pay. need be—if an emergency should befall her, say, or Suppose that Lear had cleverly taken advantage if she should need the money to help care for her of the annual exclusion amounts and of his and his beloved father in his old age. Meanwhile, Cordelia wife’s lifetime exemptions to build up trusts for each continues her education and gets a job as a nurse, of his daughters. As each turned 21 years old, Lear paying a decent salary of perhaps $40,000 a year. presented her with the sum of one million dollars From these earnings, Cordelia pays something like ($1,000,000), completely tax-free to both parent and $10,000 in various taxes every year, living a comchild. From this equal starting point, the three fortable life with the remaining $30,000, or $2,500 a children then go off in different directions down month. Cordelia marries reasonably well, as they life’s possible paths. say. She, her husband and their three children Regan, the eldest daughter, spends all of her never do withdraw any savings from “Grandpa’s money nearly at once, partying and carrying on. gift,” as the family takes to calling it. When She then resorts to begging her parents for more.

Cordelia dies at the age of 84, the King Lear But at least she has avoided paying any tax, under legacy, invested again in stocks at the familiar 10 the current flawed income-plus-death tax system. percent rate of return, would have grown to over Goneril lives somewhat more prudently. She buys five hundred million dollars ($500,000,000). an annuity that guarantees her something like But if Cordelia tries to pass this on to her children $75,000 a year for life, free of taxes. She lives rather and grandchildren, to live as she did, the governcomfortably off this as a single woman—in point of ment will take the majority of the wealth—up to fact, her lifestyle is exactly the same as someone three hundred million dollars ($300,000,000) of it— who worked hard and earned $150,000 in wages, away in taxes. Cordelia, alone among the three but saw one-half of these earnings taken away in a daughters, will have paid tax—and quite a bit of it, combination of federal, state, and local income at that. She alone among the Lear daughters

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State Pick-up Taxes: O.K. contributed work and taxes to the common pool of Soon after World War I, with the federal death tax social resources as she lived. In reward for her still in its infancy, there was a move to repeal it. thrift, she alone among the Lear daughters got to Seems that no one, except perhaps for the politicontemplate a further and most onerous tax as she cians who spend the money it appears to take in, lay dying. has ever really liked the idea of death taxes in There is something odd about this. All three practice. In any event, Congress considered an daughters were equal as of their twenty-first birthoutright repeal of the death tax in the 1920s. What day. The major difference between them is that emerged instead, however, was the precursor to Cordelia chose to work and save throughout her current Code Section 2011, providing a credit for life, and her elder sisters chose to spend. The state level taxes.18 taxman added another difference: Cordelia, alone, The state death tax credit means that one’s was asked to pay taxes, in life and on death. But federal taxes are reduced, on a dollar-for-dollar why should the frugal and thrifty among the rich be basis up to what was then a large percentage of taxed — and heavily, at their deathbeds—while the the total federal death tax (a 16 percent rate), for spendthrifts who live luxuriously should not? state death taxes paid. In essence, the government Back to the Author’s Tale I published my work against the death tax in an simultaneously nationalized death taxation and article in the Yale Law Journal, and have spent turned the proceeds over to the states. The federal much of the last government could set seven years of my the rules and the uniform rate struclife explaining it, and Think of the absurdity — the testifying before ture, while to the moderately wealthy should move extent of the pick-up, Congress and elsewhere.17 Now I am 16 percent, states from Oklahoma and to New York would get the money. proud to say that or Massachusetts to save taxes!

There was a bad there is some effort to cut down or repeal and a good reason for the pick-up stratthe death tax, root egy. The bad reason was to co-opt state politicians and all. to support the unpopular, unfair, and inefficient So as a prominent—and specifically Democratic federal death tax. The good reason was to get and liberal—critic of the federal death tax, I was states out of the game of having their own death asked to take a look at Oklahoma’s death tax, with taxes, to prevent an arbitrary and inefficient array an eye towards constructing arguments for why the of different death tax regimes, and to keep states state should join 36 others in becoming a pick-up from having an unhealthy “race to the bottom” to state. Truth be told, I would be happy to write a compete over lower death taxes. long tome on this. It turns out, however, that there is Whatever the reasons for its existence, because no need. Less really is more here. For after a preliminary analysis, I concluded that there was no of the federal credit for state-level death taxes, reason save inertia why Oklahoma should not there is no additional insult added to the injury of death taxation by a state’s having its own pick-up.19 adopt a pick-up policy. Its current death tax is archaic, complicated, inefficient, possibly costly— Granted, it might be ultra-moral if a state were to and perhaps even more immoral than the federal have no part of this blood money at all. But then the death tax, as more arbitrary. It is time to kill it. money would just sit in Uncle Sam’s coffers, and State Death Taxes: Not Always a Bad Idea that’s asking a lot of state legislatures. Given that The general case against death taxes applies we still have a federal death tax, there is no very pretty much in full force to state- level death taxes. good reason not to live up to the pick-up possibility.

There is, however, one prominent exception: the soGoing Beyond the Pick-up: Not O.K. called pick-up tax allowed by Internal Revenue If there is little reason not to have a pick-up tax, Code Section 2011. The reason that this is not a there is also little reason to go beyond it. Doing so bad tax is simple: it’s not really a tax at all. Things does add insult and injury to the harm of the fedare strange indeed in tax policy, so let’s take a little eral death tax, and so is bad for all the reasons time to explain this. that any death tax is bad. For relatively little gross

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revenue, state-level death taxes add to the stress leaves this to her brother or sister, she will owe no and expense of those estates facing the federal federal death tax—and a $115,200 Oklahoma death tax. The absolute evil of state death taxes is one.21 compounded by a relative harm. As more and more • The Oklahoma state-level death tax is needstates abandon their own death taxes, the unfairlessly complicated. Because of the very existence ness and inefficiency of those states that persist of this state death tax distinct from the federal only increases. one, thousands of small to mid-sized estates Thirty-six states have now seen the error of their have to pay an Oklahoma death tax where none ways and have adopted pick-up taxes. The more is due in federal taxes. In all cases, separate that do so, the more compelling the argument for forms and rules must be considered. In 1992, for Oklahoma to do so is. Think of the absurdity—the example, only 560 federal death tax returns were moderately wealthy completed by Oklashould move from homa residents, Oklahoma and to whereas there were Federal and State Death-Tax Returns New York or Massa4,400 state ones.22 Completed by Oklahoma Residents, chusetts to save • Going beyond 1992 taxes! the pick-up raises Oklahoma Oklahoma goes little real revenue for beyond the pick-up in Oklahoma: probespecially bizarre ably some $40 ways. Transfers to million dollar a year. spouses are exThis may sound like empted, as under the a lot, but it’s just 0.7 federal law, though percent of the Oklathere are complexihoma annual budties here that do not get. always track the • Worse, the federal beast.20 Very Oklahoma death tax is unlikely to raise wealthy estates in much if any net essence get pick-up revenue if even a status, because the Federal small fraction of the Oklahoma death tax perverse incentives it rates do not rise as generates come to be steeply as the federal acted on. Citizens tax does, so at some Source: Mark Gillett, Oklahoma Law Review, Summer 1996 can easily move to point one gets de another state to facto pick-up status. avoid the tax, as Under the 1998 recent national magazine articles suggest that they changes, once fully phased in, most transfers to do—and as states like New York and Massachulineal descendants will not generate a separate setts have feared that they will. death tax. There are additional complex rules for • Worst of all, whatever money the Oklahoma family businesses and what not. But all of this death tax raises is blood money — a deeply leaves some bizarre and arbitrary holes. Specifiunfair and arbitrary levy on certain moderately cally, almost any transfer to someone who is not a wealthy Oklahomans who are unable or unwillparent, lineal descendant, or spouse will trigger ing to leave their hard-earned savings to some death tax, and the extra burden will far spouses, parents, or lineal descendants. hardest on moderate estates.

A Tale of Five Little Sooners Consider just some of the absurdities that follow: Let’s take a moment to expound on this final • The Oklahoma death tax is unfair to small and point, about the arbitrary and unfair moral nature mid-size estates that do not have lineal descenof the Oklahoma death tax. Taxes are largely about dants or desire to make bequests to others. If a raising revenue, of course. But in picking out some person dies in 2006 with a $1,000,000 estate and

4,400

560

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and sparing others, legislatures make decisions her family accountant, visits her family lawyer, and that have moral effects. If possible, we like to tax changes her Last Will to leave her fortune to her socially harmful activities, like drinking and smokson and daughter, the millionaires in California. ing; if necessary, we like to have fair rules for Sooner Number 5 does nothing special, happily taking a fair share from citizens based on their tending her garden. earning or spending decisions, as in income or By a cruel twist of fate, each little Sooner passes sales taxes. But some taxes—like death ones—are away in her sleep on Day 2. perverse on this score: they fall on good, and Now, gentle reader, guess which if any Sooner encourage bad, or at least arbitrary, behavior. must pay any additional Oklahoma death tax?

Looking into the Oklahoma death tax enabled Sooner Number 1 doesn’t have to pay one, beme to generate another story to help illustrate the cause she has died broke. craziness of the tax. I have sometimes found it hard Sooner Number 2 doesn’t have to pay any extra to explain in serious, academic language how state death taxes (see note 6, supra, for an explastrange and unusual death taxes are—such talk nation), because she has died really rich. puts even the true believers to sleep, and invites Sooner Number 3 doesn’t have to pay one, betechnocratic mumbles about “diminishing marginal cause she has died a Texan. returns to wealth,” “level playing fields,” and other Sooner Number 4 doesn’t have to pay one, bemantras of the liberal stick-in-the-mud crowd. I cause she has left her fortune to her lineal descenhave found, as with dants in Califorthe Lear example, nia.

The tax is flat-out unfair, falling on that it’s best put in Only Sooner terms a child could Number 5—a an arbitrary group of economically understand. moderately productive citizens, and resting on Consider then the wealthy woman, a curious case of the hard and good arcane distinctions that no longer Five Little Sooners. saver, neither too make any sense, if they ever did.

The five sweet rich nor too poor, little old ladies are who is unwilling or remarkably similar. unable to give her Each is a widow, living out her days in a small fortune to his own lineal descendants—need pay house in Guthrie, having sold the family’s cattle any separate Oklahoma death tax. Specifically, ranch after her husband’s death. Each has a com$115,200 of it! fortable net worth of $1,000,000, and lives, simply What sense is there in that?

Conclusion: Get with the Times! but well, off the income. Each has a son and a The time to act is now. daughter who have moved to California and beFavorable revenue conditions mean that Oklacome “dot.com” millionaires. Each also has a homa is not dependent on the small amount of brother and sister, less fortunate, living in Oklarevenue that might be lost in abolishing its statehoma City. Each has a Last Will and Testament, level death tax and moving to a pick-up tax. duly signed and notarized, leaving everything The increasing movement of other states and except some personal family treasures to the more national trends isolate Oklahoma, and make it needy brother and sister. more likely that some of the bad consequences One fine day in the not-too-distant future (say in from having a state death tax will come into being.

2006), each little Sooner sets out to have a big day.

Massachusetts, New York, and all of Oklahoma’s Sooner Number 1 goes to Las Vegas to blow it neighbors have seen this light—or at least read the all. She comes home broke but happy. national news accounts—and abolished their own Sooner Number 2 also goes to Las Vegas, but death taxes. she gets lucky. She greatly increases her fortune, More and more moderately wealthy Oklahomans and comes home fabulously rich. may be subject to the bizarre planning and distorSooner Number 3, after an emotional chat with tions of the state’s death tax. the longstanding family accountant, picks up and Oklahoma sits on the horns of a dilemma. On moves to Texas. one horn, its death tax may continue to raise very Sooner Number 4, after an emotional chat with

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little revenue, even in gross. If so, simplification, efficiency, and fairness give powerful arguments for repeal. On the other horn, because of decreasing federal death taxes, increasing Oklahoma wealth, or both, the state-level death tax might get more punch, and raise more money. But if it does, this will only generate more attention and disrepute to Oklahoma, leading to embarrassment and more

likely bad consequences.

Worst of all, the tax is flat-out unfair, falling on an arbitrary group of economically productive citizens, and resting on arcane distinctions that no longer make any sense, if they ever did.

In short, there is no reason not to act. Just do it, as they say. Kill the state death tax, and adopt a pick-up.

Analyst, Oklahoma Tax Commission, to Tony Mastin, Director, dated September 17, 1999, puts the estimated revenue loss at 37 to 39.8 million dollars; apparently an earlier estimate from the OTC was closer to 48 million (see Estate Tax Subcommittee Report, supra, at 3); still earlier estimates cited by Gillett, supra, put the number at closer to 40 million (see Gillett at 241).

End Notes 1. IRC § 2011.

2. See Jan M. Rosen, “States Cut Death Tax to Keep Rich at Home,” The New York Times, Sunday, January 23, 2000, Section 3, p. 12; see also Ronaleen Roha, “Good Riddance: The Empire State is the Latest to put an End to its Death Tax,” Kiplinger’s Personal Finance Magazine, Sat. April 1, 2000.

10. FY-2001 Executive Budget, State of Oklahoma, Governor Frank Keating.

3. See Rosen, supra; see also Mandy Rafool, Fiscal Affairs: State Death Taxes, National Conference of State Legislatures web page, http://www.ncsl.org/programs/fiscal/ deathtax.htm, April 23, 1999.

11. This phenomenon is well discussed in Gillett, supra, and in contemporaneous news accounts of the New York repeal. See for example Rosen and Roha, supra.

4. For an excellent discussion of the then differences, see Mark R. Gillett, The Oklahoma Estate Tax: Modest Proposals for Change, 49 Oklahoma Law Review 213 (Summer, 1996).

12. 158 U.S. 601 (1895).

13. 256 U.S. 345 (1921).

14. I.R.C. § 2056(b)(7).

5. See Estate Tax Subcommittee Report, Citizen’s Task Force on Taxation, Barbara Ley, Chairman, November 20, 1998

15. I.R.C. § 2503(b)(2).

16. See Rev. Rul. 73-405, 1973-2 C.B. 321 (original IRS concession to the Crummey case). Generally, the annual donee exclusion is only available for the gift of a present interest in property.

A demand trust or a “Crummey Trust” where the beneficiary has the right to withdraw property from a trust, even though not exercised, will enable the donor to claim the annual donee exclusion. As long as the power to exercise a withdrawal right exists, the interest will qualify.

See 11 TAX MANAGEMENT PORTFOLIOS, ESTATES, GIFTS, AND TRUSTS ESTATE PLANNING, at IV.B.1(c).

6. There is no exemption level under Oklahoma’s death tax for bequests left to “collateral heirs.”

See 68 Okla. Stat. § 807 (exemptions) and § 803 (rates of tax). Because the Oklahoma death tax starts in right away but only reaches a top rate of 15 percent as compared to the maximum 16 percent allowed for the state death tax credit under IRS Section 2011, at some fairly high level – about $125 million – the Oklahoma death tax on transfers to non-lineal descendants falls below the allowable pick-up amount.

7. Carrie Coolidge, “Death Traps,” Forbes, June 14, 1999, 329.

17. See for example Edward J. McCaffery, Grave Robbers: The Moral Case against the Death Tax, Cato Institute Policy Analysis No. 358, October, 1999; reprinted in Tax Notes, December 20, 1999; Being the Best We Can Be (A Reply to

8. Roha, supra.

9. Memo from Michael C. Kaufman, Tax Policy

10

level since 1986 on certain high-level transfers of wealth to third and lower generations, most commonly from grandparents to grandchildren.

See IRC § 2601-63. The idea was to shut down a “loophole” whereby the death tax would be “skipped” at the second, or parent’s, generation. IRC § 2604 allows for a state tax credit under the GST, just as 2011does for the general death tax. The allowable GST pickup tax rate is 5 percent. However unnecessary the GST itself is — and it is pretty unnecessary — there is no reason for a state not to take advantage of the freebie allowed by IRC § 2604. See Gillett, supra, at 237-38 (discussing and recommending a state level GST pickup); Estate Tax Subcommittee Report, at 5-6 (accord). The revenue gained, while unlikely to be substantial, would further offset any revenue loss from moving systematically to pickup status.

Critics), 51 TAX LAW REVIEW 615 (1996); The Political Liberal Case against the Estate Tax, 23 PHILOSOPHY & PUBLIC AFFAIRS 281 (1994); The Uneasy Case for Wealth Transfer Taxation, 104 Yale Law Journal 283 (1994); “Tax Spending— Not Work, Savings,” Los Angeles Times, August 23, 1999; “Celebrate the Deceased, Don’t Tax Them to Death,” Seattle Times, April 9, 1999; “The (Moral) Case Against Carveouts,” 79 TAX NOTES 122, April 6, 1998; Rethinking the Estate Tax, 67 TAX NOTES 1678 (1995) reprinted in SELECTED READINGS IN TAX POLICY: 25 YEARS OF TAX NOTES (1998); Testimony, U.S. House of Representatives, Committee on Small Business, Subcommittee on Tax, Finance, & Exports, In re the Estate Tax, March 25, 1998; Testimony, U.S. Senate Committee on Finance, In re the Estate Tax, June 7, 1995 18. See Staff of the Joint Committee on Taxation Report, JCS-37-84, at n.11, September 28, 1984; see also Rafool, supra.

20. Discussed in Gillett, supra.

21. Estate Tax Subcommittee Report, supra, at 2.

19. For this reason, Oklahoma should also adopt a pickup generation-skipping tax (GST). This peculiar tax has been imposed at the federal

22. Id. Also in Gillett, supra.

11

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