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

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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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