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May 2000
No. 00-1
OCPA Policy PaperA 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.
Guarantee of Quality Scholarship
The Oklahoma Council of Public Affairs, Inc. is committed to delivering the highest quality and most reliable
research on Oklahoma issues. OCPA guarantees that all original factual data are true and correct and that
information attributed to other sources is accurately represented.
OCPA encourages rigorous critique of its research. If the accuracy of any material fact or reference to an
independent source is questioned and brought to OCPA’s attention with supporting evidence, OCPA will respond
in writing. If an error exists, it will be noted in an errata sheet that will accompany all subsequent distribution of
the publication, which constitutes the complete and final remedy under this guarantee.
2
death tax forces thousands of people to fill out
forms every year, and keeps a state bureaucracy
employed where none is needed. As it becomes
more prominent—both because of the moves of
almost all other states towards pick-up status, and
because of the federal effort to reduce or repeal the
death tax, lock, stock and barrel—there will be ever
more reason for individual Oklahomans to take
steps to avoid the adverse effects of the tax.
Is this concern mere paranoia or some kind of
“supply-side” fear? Hardly. Forbes ran an article in
June, 1999, titled “Death Traps” and subtitled “You
can’t beat the Grim Reaper. But you can outrun the
state tax collector.” The article featured a large
color-coded map, clearly showing Oklahoma’s
status as a death tax state surrounded by non-
death tax neighbors.7 Following the publication of
the Forbes article, New York got with the times,
abolished its own death tax, and became a pick-up
state. A main
reason motivat-
ing the New York
legislature was
fear of emigra-
tion to Florida,
one of the
enlightened
majority. Similar
concerns had
swayed Massa-
chusetts years
before. Louisiana and Connecticut have also since
gotten with the times, repealing their separate state-
level inheritance taxes effective in the next few years.8
This will bring the no-separate-death-tax crowd to 38
states.
What, exactly, might an Oklahoman do to avoid the
dreaded death tax? The best ways to avoid the
Oklahoma death tax are to spend all of one’s wealth,
move to almost any other state, get more money, or
give everything away to one’s kids. It’s hardly sensible
tax policy to encourage and reward such activities,
especially dying broke or leaving the state, while
punishing the seemingly randomly chosen group of
moderately wealthy decedents with no lineal descen-
dants.
Abolishing its own death tax and moving to pick-
up status would cost Oklahoma, in the first in-
stance, no more than $40 million a year.9 This may
sound like a lot of money to some, but it is well
under one percent of the total state budget of $5.7
billion.10 Worse, if almost any of the incentives
Introduction
Federal law allows a so-called pick-up tax that
piggybacks on the federal death tax, generating
revenue for states without increasing the total
death tax burdens on their citizens.1 There is no
very good reason not to have a pick-up tax; the
money is there for the taking, a result of the unwise
and unfair federal death tax. It doesn’t hurt any-
one—except possibly for one’s distant Uncle Sam—
for a state to have a pick-up tax. But going beyond
a pick-up subjects the survivors of certain economi-
cally productive citizens to additional stress and
expense at the grave site. It is not a good idea.
Proof of the wisdom of pick-up taxation is that
even New York, of all states, recently abolished its
estate tax and adopted a pick-up tax.2 All of
Oklahoma’s neighboring states have nothing other
than a pick-up tax. Thirty-six states in all do like-
wise, having just a pick-up tax.3 Only three states—
Oklahoma
joined by Missis-
sippi and
Ohio—have an
estate tax going
over and above
the federal
freebie. Okla-
homa is increas-
ingly isolated in
going beyond
the pick-up and
imposing additional death taxes on some of its
citizens.
It’s even worse than that. The Oklahoma death
tax only applies to some decedents, and it’s a
rather odd lot indeed.
It turns out that the Oklahoma death tax has long
been out of synch with its federal cousin.4 In 1998,
the Oklahoma Legislature passed long-overdue
legislation to bring the exemption level under the
state death tax in line with the federal exemption
level—eventually.5 By 2006, when both the new
state and federal exemption levels are fully phased
in, Oklahoman decedents leaving their estates to
spouses or lineal descendants will face no effective
additional state-level tax—though they may still
have to complete forms and deal with arcane
differences in the two taxing regimes. But this still
leaves, bizarrely enough, those having any sized
estate whatsoever but no lineal descendants to pay
an additional state-level tax.6
It’s still worse than that. The separate Oklahoma
I happen to be a life-long Democrat, and
a liberal one at that. I’m interested in tax
law because I strongly believe that
getting principles of taxation down right
is a fundamental matter of social justice.
3
generated by the perverse tax become real, the
“supra pickup tax” that Oklahoma now has could
well cost the state money. If a handful of moder-
ately wealthy Oklahomans move to Texas or some
other state to avoid the tax, the state loses ongoing
income and sales taxes, along with even the pick-
up amount that the federal government is prepared
to give it, gratis, on account of these citizens. This
logic has persuaded legislatures in tax-hungry
states like New York and Massachusetts to aban-
don their death taxes
— for the sake of
money, if not morality.11
It’s time to stop the
insanity. There is nogood reason for per-
sisting in a death tax
over and above the
pick-up. The Oklahoma
state-level death tax is
complicated, unfair,
inefficient, and raises
little money by any
account. The odds of
its losing money, all
things considered, are
high. Worst of all, one
should think, whatever
money it does raise is
dirty money—sucked
from the deathbeds of
those unfortunate,
wealthy but not too
wealthy, Oklahomans
who have had the
misfortune not to be
passing their wealth on
to their lineal descen-
dants. In a world of nutty taxes, such a state-level
death tax might be the nuttiest.Federal Death Taxes: A Bad Idea
The federal death tax is itself a bad idea. Under-
standing how the tax works and what’s wrong with
it are relevant to the case against state death taxes
for two reasons.
One, the basic inefficiency and immorality of death
taxes strongly suggests that states should not add
their own insults and injury to the federally imposed
harm.
Two, it is important to understand that the case
against the federal death tax is a strong one that is
gaining steam. While on the one hand this sug-
gests that states might want to shore up their own
state-level death taxes, a more reasoned appraisal
suggests just the opposite course of action. Were
the federal government to reduce or repeal alto-
gether its own death tax, the handful of states
having their own death taxes would only stand out
all the more. Oklahomans who may not actually
leave the state to save tens of thousands would now
be confronted with tax savings in the hundreds of
thousands. Articles like the Forbes piece from June,
1999, would be sure to
follow. The already bad
situation would only get
worse. All of this sug-
gests that state-level
officials listen to the
more general case
against death taxes,
and learn to wean
themselves from this
misguided tax.
Before proceeding to
a quick overview of the
federal death tax and
the case against it, I
would like to interject a
personal note. I happen
to be a life-long Demo-
crat, and a liberal one
at that. I was born and
raised in New Jersey,
educated in public
schools and then Yale
and Harvard. I became
interested in tax law, as
I remain to this day,
because I strongly
believe that getting
principles of taxation down right is a fundamental
matter of social justice. As a young and liberal law
professor, thinking these thoughts, I decided to look
into the gift and estate tax, believing that there
must be some way to strengthen this important
public policy tool. This was to be my first scholarly
project.
Some time later I came to the realization that I
was blind, but now can see. Years of thinking and
research led me to the surprising conclusion that
the federal gift and estate tax—the death tax—was
a bad tax, even (and maybe especially) on liberal
grounds. Let me summarize this research quickly,
for it sets the stage for understanding what is
Oklahoma Surrounded byEstate-Friendly States
CO
Estate-Friendly
Estate-Friendly: ”States with no death or inheritance taxes.”
Almost Heaven: ”States with no death or inheritance taxesand no personal income or capital gains taxes. Die here!”
Not Good: “States that impose an inheritance or death tax.”
Source: Forbes, June 14, 1999
KS
Estate-Friendly
MO
Estate-
Friendly
AR
Estate-
Friendly
NM
Estate-
Friendly
TX
Almost Heaven
OKLAHOMA Not Good
4
wrong with the Oklahoma death tax.The Nature of the Beast
America has had a death tax of some form since
1916, the first year that the modern personal in-
come tax was put in place. Before then, there were
scattered periods when federal taxes were imposed
on the receipt, rather than the transfer, of property.
In 1894, for example, gifts, bequests, and inherit-
ances were included in taxable income. One year
later, in Pollock v. Farmer’s Loan & Trust Co.,12 the
Supreme Court invalidated the income tax as
unconstitutional under Article I, Section 9 of the
Constitution, which prohibits any “direct” tax with-
out apportionment among the citizens of the vari-
ous states. After the Sixteenth Amendment became
effective in 1913, Congress reinstated the federal
income tax, but chose to exclude gifts, bequests
and inheritances from taxable income, hence the
perceived need for a separate death tax. The
constitutionality of
the tax was upheld
in New York Trust Co.v. Eisner,13 where the
Court held that the
death tax was a tax
on the transfer of
property, not on its
ownership, and so
was an “indirect” tax
that need not be
apportioned under
the Constitution.
A federal gift tax was first enacted in 1924. This
tax was designed to complement the income and
death taxes by taxing transfers that would reduce
either or both the donor’s taxable estate or future
taxable income. It was especially important to
prevent a wealthy person from avoiding the death
tax by making gifts on his or her deathbed—a
situation awkwardly policed by rules governing
gifts in anticipation of death. As originally enacted,
the gift tax was ineffective because it was com-
puted on an annual basis, without regard to gifts
made in prior years. As such, a donor’s first gift
each year was subject to the bottom rate bracket in
the progressive system. That gift tax was repealed in
1926 and then permanently revived in 1932, with the
tax rates based on the donor’s cumulative taxable
gifts rather than just those made in the particular
year.
Rates were increased under both the gift and
death tax fairly frequently through 1941, when the
top rate bracket reached 77 percent under the
death tax. From 1942 to 1976, there was very little
change in the gift or death taxes. Death taxes were
imposed on transfers occurring at death; gift taxes
were imposed on transfers made during a
taxpayer’s life. Under the Tax Reform Act of 1976,
the estate and gift tax structures were combined
into a single unified gift and estate tax system,
which can be seen as a wealth transfer tax. It
applies to the cumulative taxable transfers made
by a taxpayer during life or at death.
There are several large exceptions and exclu-
sions to the federal death tax that mean that most
Americans never have to worry much about it. Only
one to two percent of people who die in this country
each year leave enough wealth behind to generate
any death tax at all. The tax contributes a rather
small part—about one percent—of all federal
revenues. At least since World War II, when both the
income tax and the
federal payroll tax
system began to
gather steam, the
death tax has never
been a significant
revenue-raiser, rarely
accounting for more
than two percent of
total federal receipts.
Its significance has
remained extremely
limited in recent
times, generally around the one percent level.
Nonetheless, for people wealthy enough to be
concerned about it, the death tax can be a steep
tax indeed. It starts in—after the exemption or “zero
bracket” level, to be discussed below—at an effec-
tive rate of 37 percent and quickly reaches a flat 55
percent rate. A small percentage of taxable estates
end up paying a large percentage of the total taxes
collected. When the death tax was first imposed,
the tax was targeted at the rich, with rates ranging
from one to 10 percent. Even so, it was an unpopu-
lar tax, which played into the pick-up story to be
discussed below. Times changed during World War
II, however, as the war needs led to massive in-
creases in all forms of federal taxation. The maxi-
mum death tax rate increased to 77 percent in 1941.
Things have a way of lingering long beyond the
reason for them has passed, and, after the Tax
Reform Act of 1976, the estate and gift tax rates
ranged from 18 percent to 70 percent. Today, the
The separate Oklahoma death tax
forces thousands of people to fill
out forms every year, and keeps a
state bureaucracy employed
where none is needed.
5
death tax ranges from 37 percent to 55 percent.
There are three major exceptions and exclusions
to the tax that go a fair way towards explaining its
limited yield:
1. Gifts or bequests left to a spouse are typically not
taxable, under the so-called marital deduction.14
There are numerous complexities in this spousal
deduction, nearly all of them unfortunate. But the
bottom line is that most married couples do not
pay any death tax until both of them have died.
2. Each person has a cumulative lifetime exemption
level before any tax is due—this is the “zero
bracket” of the death tax. The unified credit
amount, as it is called, became $600,000 in 1981;
Congress agreed to raise it to $1,000,000 over a
series of years, beginning in 1997 and ending in
2006. A husband and wife, with careful planning,
can combine their lifetime exemption amounts so
that a married couple can leave $2,000,000 to
their children, tax-free.
3. In addition to this $1,000,000 benefit, there is an
“annual exclu-
sion amount”
of $10,000.15
This can be
given per
donor, per
donee, per
year—all
without count-
ing against the $1,000,000 lifetime exemption.
Once again a husband and wife can combine
their amounts. So a married couple can give
$20,000 to each of their children each year,
without incurring any tax or subtracting from
their lifetime exemption amounts. The popular
“Crummey” trust device, among others, allows
this annual exclusion amount to be used even for
transfers into trust.16
The basic operation of the death tax is easy
enough to state. When a person dies, the govern-
ment adds up all of the assets in her estate at their
then-fair-market value. It next adds in the value of
any taxable gifts she made during her life—that is
gifts over and above the annual exclusion amounts.
Finally, the government subtracts debts. If all of that
comes out to less than $1 million (using the fully
phased-in 2006 values)—as it would for the vast
majority of American decedents—there are no
further questions. If the decedent’s estate is worth
more than $1 million, the government next subtracts
out any qualified transfers to a surviving spouse.
Then and only then would a death tax be paid, at
the steep rates noted above.
There are many other special provisions that
relate to such things as charitable contributions;
payments for tuition and medical expenses; the
taxation of trusts; ownership of farms and small
family-held businesses; life insurance, and so on.
The death tax system is enormously complicated. It
has fueled a well-paid cottage industry of death tax
lawyers and planners. But we know enough now to
get a sense of what is basically wrong with this
death tax, especially since outright repeal turns out
to be by far the best option for fixing it.
The Tragedy of the Lears
Sometimes a story is worth a thousand or so
academic words—or is at least more fun to read. I
have been pressing an argument for many years, in
many venues across the country, that the federal
death tax is a bad tax because it is an “anti-sin” or
a “virtue” tax—it falls on just those activities we
should want our most economically productive
citizens to be
doing. A simple
fictional tale gets
the main points
across perfectly
well.
King Lear and
his wife have
three daughters,
Regan, Goneril, and Cordelia. The Lears are
wealthy and well advised. Every year, they give
each daughter the full $20,000 that the law allows
them to give, tax-free. It is a fairly simple matter to
put this money into trusts, so that the daughters
cannot spend it imprudently. Over time, this can get
to be a big deal indeed.
Invested in the stock market at its historic 10
percent rate of return, each daughter would have
over one million dollars ($1,000,000) by the time she
reached age 20, over three million ($3,000,000) by
age 30, and nearly nine million ($9,000,000) by age
40. No taxes need be paid. The Lear daughters can
easily manipulate tensions within the income tax with
their wealth—investing in non-income producing
assets or tax-exempt bonds, for example—and so
they need never pay any income, payroll, or any other
kind of tax. Nor need they ever work a day in their
lives.
It can get worse. Suppose that the Lears decided
to endow their favorite daughter, Cordelia, with
their full exemption amount, two million dollars
Why should the frugal and thrifty be
taxed while the spendthrifts who live
luxuriously are not?
6
($2,000,000), at the time of her birth. Very wealthy
Americans, like H. Ross Perot or Bill Gates, can
easily afford to do the same. Supplemented with
the $20,000 annual gifts, Cordelia would have a
personal fortune of almost one hundred million
dollars ($100,000,000) by her fortieth birthday. She
could live happily ever after at a spending level of
ten million dollars ($10,000,000) or so a year — all
without ever paying a penny to her (distant) Uncle
Sam.
The current income-plus-death tax with all of its
loopholes and flaws—a tax built up and defended
in the name of fairness—allows and even encour-
ages this sort of thing. It’s a travesty, at least, if not
a tragedy. Not only is the current death tax so
porous as to call
its claim to fair-
ness into ques-
tion, it also falls—
when it falls at
all—on the wrong
parties. Let’s look
at the possibly
divergent fates of
the Lear daugh-
ters, in terms of
their choices of
how to live and in
terms of how
much taxes they pay.
Suppose that Lear had cleverly taken advantage
of the annual exclusion amounts and of his and his
wife’s lifetime exemptions to build up trusts for each
of his daughters. As each turned 21 years old, Lear
presented her with the sum of one million dollars
($1,000,000), completely tax-free to both parent and
child. From this equal starting point, the three
children then go off in different directions down
life’s possible paths.
Regan, the eldest daughter, spends all of her
money nearly at once, partying and carrying on.
She then resorts to begging her parents for more.
But at least she has avoided paying any tax, under
the current flawed income-plus-death tax system.
Goneril lives somewhat more prudently. She buys
an annuity that guarantees her something like
$75,000 a year for life, free of taxes. She lives rather
comfortably off this as a single woman—in point of
fact, her lifestyle is exactly the same as someone
who worked hard and earned $150,000 in wages,
but saw one-half of these earnings taken away in a
combination of federal, state, and local income
taxes, payroll taxes, and other expenses of the
working world. When Goneril later marries, the
family lives off of her husband’s income, while
Goneril’s “trust money”—as she calls it—continues
to subsidize her personal spending habits. Goneril
outlives her husband and spends all of her inherit-
ance from him, too. When she dies, broke, her three
children inherit nothing. In this scenario, Goneril,
like her elder sister Regan, never pays any federal
taxes—no income, no social security, no gift or
death taxes—on account of her own work or sav-
ings. Indeed, she has never worked for pay or
saved anything in her life, which has been spent in
a steady pattern of dissaving her father’s and her
husband’s money.
Cordelia, the
youngest daugh-
ter, follows a
different route.
She puts her one
million dollars
($1,000,000) into
an investment
account, pru-
dently managed
in stock funds.
She vows to
withdraw some of
her capital only if
need be—if an emergency should befall her, say, or
if she should need the money to help care for her
beloved father in his old age. Meanwhile, Cordelia
continues her education and gets a job as a nurse,
paying a decent salary of perhaps $40,000 a year.
From these earnings, Cordelia pays something like
$10,000 in various taxes every year, living a com-
fortable life with the remaining $30,000, or $2,500 a
month. Cordelia marries reasonably well, as they
say. She, her husband and their three children
never do withdraw any savings from “Grandpa’s
gift,” as the family takes to calling it. When
Cordelia dies at the age of 84, the King Lear
legacy, invested again in stocks at the familiar 10
percent rate of return, would have grown to over
five hundred million dollars ($500,000,000).
But if Cordelia tries to pass this on to her children
and grandchildren, to live as she did, the govern-
ment will take the majority of the wealth—up to
three hundred million dollars ($300,000,000) of it—
away in taxes. Cordelia, alone among the three
daughters, will have paid tax—and quite a bit of it,
at that. She alone among the Lear daughters
There is no reason save inertia why
Oklahoma should not adopt a pick-up
policy. Its current death tax is archaic,
complicated, inefficient, possibly
costly — and perhaps even more
immoral than the federal death tax, as
more arbitrary. It is time to kill it.
7
contributed work and taxes to the common pool of
social resources as she lived. In reward for her
thrift, she alone among the Lear daughters got to
contemplate a further and most onerous tax as she
lay dying.
There is something odd about this. All three
daughters were equal as of their twenty-first birth-
day. The major difference between them is that
Cordelia chose to work and save throughout her
life, and her elder sisters chose to spend. The
taxman added another difference: Cordelia, alone,
was asked to pay taxes, in life and on death. But
why should the frugal and thrifty among the rich be
taxed — and heavily, at their deathbeds—while the
spendthrifts who live luxuriously should not?Back to the Author’s Tale
I published my work against the death tax in an
article in the Yale Law Journal, and have spent
much of the last
seven years of my
life explaining it, and
testifying before
Congress and else-
where.17 Now I am
proud to say that
there is some effort to
cut down or repeal
the death tax, root
and all.
So as a prominent—and specifically Democratic
and liberal—critic of the federal death tax, I was
asked to take a look at Oklahoma’s death tax, with
an eye towards constructing arguments for why the
state should join 36 others in becoming a pick-up
state. Truth be told, I would be happy to write a
long tome on this. It turns out, however, that there is
no need. Less really is more here. For after a pre-
liminary analysis, I concluded that there was no
reason save inertia why Oklahoma should notadopt a pick-up policy. Its current death tax is
archaic, complicated, inefficient, possibly costly—
and perhaps even more immoral than the federal
death tax, as more arbitrary. It is time to kill it.State Death Taxes: Not Always a Bad Idea
The general case against death taxes applies
pretty much in full force to state- level death taxes.
There is, however, one prominent exception: the so-
called pick-up tax allowed by Internal Revenue
Code Section 2011. The reason that this is not a
bad tax is simple: it’s not really a tax at all. Things
are strange indeed in tax policy, so let’s take a little
time to explain this.
State Pick-up Taxes: O.K.
Soon after World War I, with the federal death tax
still in its infancy, there was a move to repeal it.
Seems that no one, except perhaps for the politi-
cians who spend the money it appears to take in,
has ever really liked the idea of death taxes in
practice. In any event, Congress considered an
outright repeal of the death tax in the 1920s. What
emerged instead, however, was the precursor to
current Code Section 2011, providing a credit for
state level taxes.18
The state death tax credit means that one’s
federal taxes are reduced, on a dollar-for-dollar
basis up to what was then a large percentage of
the total federal death tax (a 16 percent rate), for
state death taxes paid. In essence, the government
simultaneously nationalized death taxation and
turned the proceeds over to the states. The federal
government could set
the rules and the
uniform rate struc-
ture, while to the
extent of the pick-up,
16 percent, states
would get the money.
There was a bad
and a good reason
for the pick-up strat-
egy. The bad reason was to co-opt state politicians
to support the unpopular, unfair, and inefficient
federal death tax. The good reason was to get
states out of the game of having their own death
taxes, to prevent an arbitrary and inefficient array
of different death tax regimes, and to keep states
from having an unhealthy “race to the bottom” to
compete over lower death taxes.
Whatever the reasons for its existence, because
of the federal credit for state-level death taxes,
there is no additional insult added to the injury of
death taxation by a state’s having its own pick-up.19
Granted, it might be ultra-moral if a state were to
have no part of this blood money at all. But then the
money would just sit in Uncle Sam’s coffers, and
that’s asking a lot of state legislatures. Given that
we still have a federal death tax, there is no very
good reason not to live up to the pick-up possibility.Going Beyond the Pick-up: Not O.K.
If there is little reason not to have a pick-up tax,
there is also little reason to go beyond it. Doing so
does add insult and injury to the harm of the fed-
eral death tax, and so is bad for all the reasons
that any death tax is bad. For relatively little gross
Think of the absurdity — the
moderately wealthy should move
from Oklahoma and to New York
or Massachusetts to save taxes!
8
revenue, state-level death taxes add to the stress
and expense of those estates facing the federal
death tax. The absolute evil of state death taxes is
compounded by a relative harm. As more and more
states abandon their own death taxes, the unfair-
ness and inefficiency of those states that persist
only increases.
Thirty-six states have now seen the error of their
ways and have adopted pick-up taxes. The more
that do so, the more compelling the argument for
Oklahoma to do so is. Think of the absurdity—the
moderately wealthy
should move from
Oklahoma and to
New York or Massa-
chusetts to savetaxes!
Oklahoma goes
beyond the pick-up in
especially bizarre
ways. Transfers to
spouses are ex-
empted, as under the
federal law, though
there are complexi-
ties here that do not
always track the
federal beast.20 Very
wealthy estates in
essence get pick-up
status, because the
Oklahoma death tax
rates do not rise as
steeply as the federal
tax does, so at some
point one gets de
facto pick-up status.
Under the 1998
changes, once fully phased in, most transfers to
lineal descendants will not generate a separate
death tax. There are additional complex rules for
family businesses and what not. But all of this
leaves some bizarre and arbitrary holes. Specifi-
cally, almost any transfer to someone who is not a
parent, lineal descendant, or spouse will trigger
some death tax, and the extra burden will far
hardest on moderate estates.
Consider just some of the absurdities that follow:
• The Oklahoma death tax is unfair to small and
mid-size estates that do not have lineal descen-
dants or desire to make bequests to others. If a
person dies in 2006 with a $1,000,000 estate and
leaves this to her brother or sister, she will owe no
federal death tax—and a $115,200 Oklahomaone.21
• The Oklahoma state-level death tax is need-
lessly complicated. Because of the very existence
of this state death tax distinct from the federal
one, thousands of small to mid-sized estates
have to pay an Oklahoma death tax where none
is due in federal taxes. In all cases, separate
forms and rules must be considered. In 1992, for
example, only 560 federal death tax returns were
completed by Okla-
homa residents,
whereas there were
4,400 state ones.22
• Going beyond
the pick-up raises
little real revenue for
Oklahoma: prob-
ably some $40
million dollar a year.
This may sound like
a lot, but it’s just 0.7
percent of the Okla-
homa annual bud-
get.
• Worse, the
Oklahoma death tax
is unlikely to raise
much if any netrevenue if even a
small fraction of the
perverse incentives it
generates come to be
acted on. Citizens
can easily move to
another state to
avoid the tax, as
recent national magazine articles suggest that they
do—and as states like New York and Massachu-
setts have feared that they will.
• Worst of all, whatever money the Oklahoma
death tax raises is blood money — a deeply
unfair and arbitrary levy on certain moderately
wealthy Oklahomans who are unable or unwill-
ing to leave their hard-earned savings to
spouses, parents, or lineal descendants.A Tale of Five Little Sooners
Let’s take a moment to expound on this final
point, about the arbitrary and unfair moral nature
of the Oklahoma death tax. Taxes are largely about
raising revenue, of course. But in picking out some
Oklahoma
4,400
Federal
560
Source: Mark Gillett, Oklahoma Law Review, Summer 1996
Federal and State Death-Tax Returns
Completed by Oklahoma Residents,
1992
9
and sparing others, legislatures make decisions
that have moral effects. If possible, we like to tax
socially harmful activities, like drinking and smok-
ing; if necessary, we like to have fair rules for
taking a fair share from citizens based on their
earning or spending decisions, as in income or
sales taxes. But some taxes—like death ones—are
perverse on this score: they fall on good, and
encourage bad, or at least arbitrary, behavior.
Looking into the Oklahoma death tax enabled
me to generate another story to help illustrate the
craziness of the tax. I have sometimes found it hard
to explain in serious, academic language how
strange and unusual death taxes are—such talk
puts even the true believers to sleep, and invites
technocratic mumbles about “diminishing marginal
returns to wealth,” “level playing fields,” and other
mantras of the liberal stick-in-the-mud crowd. I
have found, as with
the Lear example,
that it’s best put in
terms a child could
understand.
Consider then the
curious case of the
Five Little Sooners.
The five sweet
little old ladies are
remarkably similar.
Each is a widow, living out her days in a small
house in Guthrie, having sold the family’s cattle
ranch after her husband’s death. Each has a com-
fortable net worth of $1,000,000, and lives, simply
but well, off the income. Each has a son and a
daughter who have moved to California and be-
come “dot.com” millionaires. Each also has a
brother and sister, less fortunate, living in Okla-
homa City. Each has a Last Will and Testament,
duly signed and notarized, leaving everything
except some personal family treasures to the more
needy brother and sister.
One fine day in the not-too-distant future (say in
2006), each little Sooner sets out to have a big day.
Sooner Number 1 goes to Las Vegas to blow it
all. She comes home broke but happy.
Sooner Number 2 also goes to Las Vegas, but
she gets lucky. She greatly increases her fortune,
and comes home fabulously rich.
Sooner Number 3, after an emotional chat with
the longstanding family accountant, picks up and
moves to Texas.
Sooner Number 4, after an emotional chat with
her family accountant, visits her family lawyer, and
changes her Last Will to leave her fortune to her
son and daughter, the millionaires in California.
Sooner Number 5 does nothing special, happily
tending her garden.
By a cruel twist of fate, each little Sooner passes
away in her sleep on Day 2.
Now, gentle reader, guess which if any Sooner
must pay any additional Oklahoma death tax?
Sooner Number 1 doesn’t have to pay one, be-
cause she has died broke.
Sooner Number 2 doesn’t have to pay any extra
state death taxes (see note 6, supra, for an expla-
nation), because she has died really rich.
Sooner Number 3 doesn’t have to pay one, be-
cause she has died a Texan.
Sooner Number 4 doesn’t have to pay one, be-
cause she has left her fortune to her lineal descen-
dants in Califor-
nia.
Only Sooner
Number 5—a
moderately
wealthy woman, a
hard and good
saver, neither too
rich nor too poor,
who is unwilling or
unable to give her
fortune to his own lineal descendants—need pay
any separate Oklahoma death tax. Specifically,
$115,200 of it!
What sense is there in that?Conclusion: Get with the Times!
The time to act is now.
Favorable revenue conditions mean that Okla-
homa is not dependent on the small amount of
revenue that might be lost in abolishing its state-
level death tax and moving to a pick-up tax.
The increasing movement of other states and
national trends isolate Oklahoma, and make it
more likely that some of the bad consequences
from having a state death tax will come into being.
Massachusetts, New York, and all of Oklahoma’s
neighbors have seen this light—or at least read the
national news accounts—and abolished their own
death taxes.
More and more moderately wealthy Oklahomans
may be subject to the bizarre planning and distor-
tions of the state’s death tax.
Oklahoma sits on the horns of a dilemma. On
one horn, its death tax may continue to raise very
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.
10
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.
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 Maga-zine, Sat. April 1, 2000.
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.
4. For an excellent discussion of the then differ-
ences, see Mark R. Gillett, The Oklahoma EstateTax: Modest Proposals for Change, 49 Okla-
homa Law Review 213 (Summer, 1996).
5. See Estate Tax Subcommittee Report, Citizen’s
Task Force on Taxation, Barbara Ley, Chair-
man, November 20, 1998
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 descen-
dants falls below the allowable pick-up amount.
7. Carrie Coolidge, “Death Traps,” Forbes, June
14, 1999, 329.
8. Roha, supra.
9. Memo from Michael C. Kaufman, Tax Policy
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).
10. FY-2001 Executive Budget, State of Oklahoma,
Governor Frank Keating.
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.
12. 158 U.S. 601 (1895).
13. 256 U.S. 345 (1921).
14. I.R.C. § 2056(b)(7).
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). Gener-
ally, the annual donee exclusion is only avail-
able 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).
17. See for example Edward J. McCaffery, GraveRobbers: 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
11
Critics), 51 TAX LAW REVIEW 615 (1996); The Politi-cal Liberal Case against the Estate Tax, 23
PHILOSOPHY & PUBLIC AFFAIRS 281 (1994); TheUneasy 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 EstateTax, 67 TAX NOTES 1678 (1995) reprinted in
SELECTED READINGS IN TAX POLICY: 25 YEARS OF TAXNOTES (1998); Testimony, U.S. House of Repre-
sentatives, 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.
19. For this reason, Oklahoma should also adopt a
pickup generation-skipping tax (GST). This
peculiar tax has been imposed at the federal
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, genera-
tion. 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 Subcom-
mittee 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.
20. Discussed in Gillett, supra.
21. Estate Tax Subcommittee Report, supra, at 2.
22. Id. Also in Gillett, supra.
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