A COMMISSION REPORT Coordination of State and Federal Inheritance, le.s. ADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS JANUARY 1961 ADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS FRANK BANE, Chairman 1 JAMES K. POLLOCK, Vice Chairman, Ann Arbor, Mich. EDWARD CONNOR, Councilman, Wayne County, Mich. CLAIR DONNENWIRTH, Supervisor, Plumas County, Portola, FLORENCE P. DWYER, MRS., Member of the House of Representatives SAM J. ERVIN, JR., Member of the Senate ARTHUR S. FLEMMING, Secretary of Health, Education, and Welfare1 LAWRENCE H. FOUNTAIN, Member of the House of Representatives ERNEST F. HOLLINGS, Governor of South Carolina DON HUMMEL, Mayor, Tucson, Ariz. EDWIN MICHAELIAN, County Executive, Westchester County, N.Y. WILBUR D. MILLS, Member of the House of Representatives 2 KARL E. MUNDT, Member of the Senate WILLIAM G. COLMAN, Executive Director 1 Membership on the Commission expired January 20, 1961. 'Resigned January 1961. 'Membership on the Commission expired January 2, 1961. 'Replaced by John Anderson, Jr., Governor of Kansas, January 19, 1961. PREFACE Public Law 86-380 places on the Advisory Commission on Intergovernmental Relations the duty, among others, to recommend, within the framework of the Constitution, the most desirable allocation of governmental functions, responsibilities, and revenues among the several levels of government; and to recommend methods of coordinating and simplifying tax laws and administrative practices in order to achieve a more orderly and less competitive fiscal relationship between the levels of government and reduce the burden of compliance for taxpayers. This report pertains to inheritance, estate, and gift taxation. In selecting it as its first project in the area of tax coordination and simplification, the Commission was influenced by several considerations. The coordination achieved between Federal and State death taxes (inheritance and estate taxes) in 1926, by granting taxpayers a credit against their Federal estate tax liability for death taxes paid to States, has become obsolete during the intervening 35 years. The need for updating it has been urged for some years by legislators, State officials, the legal and accounting professions, and by students of taxation. Spokesmen for the States feel particularly aggrieved because Federal estate tax changes enacted in 1932 and thereafter markedly reduced the States' proportionate share of this revenue area. The existing FederalState death tax system is characterized by interstate diversity. Its excessive complexity aggravates taxpayers' compliance and tax enforcement burdens. Occasionally multiple taxation results. While cooperation between State and Federal tax administrations is well advanced, the opportunities for effective joint utilization of enforcement resources have not been fully developed. A new coordination effort affords an opportunity to move forward in all of these directions. The Federal tax system encourages the distribution of wealth during the lifetime of its owner by imposing lower taxes on gifts during life than on bequests at death. This reduces the size of the tax base to which State death taxes apply. Unlike the Federal Government, however, most States have not imposed gift taxes because they are administratively impracticable. Some States, in any event, would be unable to make effective use of them without the protective umbrella of Federal legislation. The gift tax is the essential complement of the Federal estate tax. A new coordination effort should allow for the effect of the gift tax on the States' death tax revenues. A rearrangement of Federal-State death tax relations would make some, albeit small, contribution to the tax collections of the States and they have an urgent need for more revenue. More importantly, it would revitalize an intergovernmental arrangement to which the States attach symbolic significance far and above its dollar and cent value. While the rearrangement of intergovernmental tax relations will necessarily entail some loss of estate tax revenues to the Federal Government, it is possible to spread the impact of that loss over several years and to limit it to magnitudes compatible with budgetary conditions in prospect for the near future. The estate tax credit has already received preliminary attention from the Joint Federal-State Action Committee which initiated the collection of some of the basic data required for an analysis of alternative solutions. This Commission has fallen heir to both the problem and the data which bear upon it. These considerations make the inheritance, estate, and gift taxes a logical starting point for implementing the Commission's statutory mandate to facilitate intergovernmental tax coordination and simplification. We respectfully submit the conclusions and recommendations contained herein to the President, the Congress, the Governors and the legislatures of the States. This report was adopted at a meeting of the Commission held in Washington, D.C., on January 18, 1961. FRANK BANE, Chairman. ACKNOWLEDGMENTS The staff work for this report was conducted by Mr. L. L. Ecker-Racz, Research Associate. In developing the report, Mr. Ecker-Racz benefited from assistance and advice generously provided by several agencies, organizations and individuals. The Commission desires to express its appreciation to the State inheritance and estate tax administrators and to the District Directors of Internal Revenue for their calculations of the effect of alternative tax credit methods on State tax liabilities; to the Statistics Division, Internal Revenue Service, for processing these data and for preparing a variety of special tabulations from Federal estate tax returns; to the Tax Analysis Staff, Office of the Secretary of the Treasury, for revenue estimates and comparative data on State taxes; to the National Tax Association's Committee on Intergovernmental Fiscal Relations (Professor A. G. Buehler, Chairman) and to the National Association of Tax Administrators (Mr. Charles F. Conlon, Executive Secretary) for criticism and counsel at several stages of the development of this report; and to the economists and other individuals too numerous to list here who interrupted their teaching and other duties on short notice to review a draft of this report. F.B. |