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States' Rights in Inheritance Taxes

BEHIND the renewed agitation for repeal of the federal estate-tax stand in solid ranks the President and the Secretary of the Treasury, the United States Chamber of Commerce, state legislators by the hundred, polled on the question by the well financed organizations who are agitating it, and many others—in short, a goodly portion of the organized wealth of the country. Some of these gentlemen believe, and frankly say, that they are opposed to any inheritance tax, no matter by whom levied. To such honorable combatants this article is not addressed. But if the issue were to be fought in the open on this ground, the agitation for repeal would lose much of its force. The most persuasive arguments, which have aroused the greatest volume of support, are those which allege that estate or inheritance taxation is the proper province of the states; that the Intrusion of the federal government into this field causes unwarranted duplication and confusion. Such arguments are probably as dishonest at their source as they are unsound in their substance. The main purpose of these arguments is, as the main result of repeal would be, to render inheritance taxation ineffective even when levied by the states.    

The uncertainty of state inheritance-taxation arises from two sources—the inequality of the several state laws, and the difference in efficiency of enforcement. It is well known by this time that Florida not only has no inheritance tax, but has a constitutional provision against the enactment of one. It is not so well known that there are significant differences among the other states—as between New York and New Jersey. In a New York newspaper recently appeared the following advertisement of a New Jersey bank, situated within a few minutes of Wall Street:    


New Jersey laws give to non-residents banking privileges unobtainable in New York in the event of death. 

Explanatory leaflet E on request.

Illegal evasion and legal avoidance of state laws are both easy to practise, and are practised. Brown, let us say, being a resident of one state, owns a safe-deposit box in another state, to which both he und his daughter have access. The existence of this box and of its contents is not known in his place of residence. Brown dies. His daughter, without the knowledge of any responsible person in her father's state of domicile, goes to the safe deposit and removes a large amount in cash, bonds and securities. Nobody in the state where the box is held has official knowledge of her father's death; nobody has any interest or duty in helping the other state enforce its laws. The law is evaded with perfect impunity, at the price merely of silence. Such evasion cannot be stopped without efficient federal machinery. 

If a person is too squeamish to practise deception, he may readily resort to legal avoidance. Smith owns property in numerous states, which would normally be subject to the inheritance-tax laws of those states upon his death. But he forms a corporation in his own state, and transfers to it the title to these scattered properties. Smith dies. His property—consisting of shares in the corporation—is subject to any inheritance tax which may exist in the state in which he is domiciled. But the corporation does not die. Its property is not, therefore, subject to inheritance taxation anywhere. Smith avoids the tax in every state but one. And if he and his corporation happen to be domiciled in Florida, no tax is collected by any state. If it were not for the federal law, the states which wish to collect inheritance taxes would be cheated out of any return whatever. When a maneuver of this nature is so easy, only complaisance on the part of men of wealth would permit the collection of state or inheritance levies from their executors by any authority, were the federal estate-tax repealed. 

Perhaps the most vicious feature of this situation is that those who have the larger fortunes, and are supposed to bear the larger burdens of the tax by virtue of progressive rates, can most easily avoid it. They have the requisite legal and accounting advice, and the means necessary for indirect administration. The smaller inheritances, consisting of property difficult to incorporate and domicile in distant states, cannot escape so easily. 

Probably many possessors of fortunes who are pleading the sacred cause of states' rights in inheritance taxation are found at the same time among those who take an over-realistic view of interstate competition, when it comes to laws regulating the employment of women and children, or to dealing with labor. You must never, they say, try to limit hours to forty-eight in this state, we must never consent to unionization or higher wages, because in that case some other state with lower standards would take away all our business. Yet competition of this type is indirect and uncertain, it is limited by all sorts of other factors, such as favorable geographical location, efficiency, skill and control of markets. Interstate competition in inheritance taxation, however, is direct and immediate. You can transfer a domicile from one state to another, or rent a safe-deposit box, or form a dummy corporation, much more easily than you can move a factory or succumb to competition in the markets, Why do not these gentlemen point out that the certain result of varying state standards in inheritance taxation will be a drifting of estates outside the jurisdiction of the higher standards? They do not say so, of course, because they want to furnish part of the drift. With the federal law out of the way, the rest will be easy.

If one wants to be a dogmatic states'-righter, he may declare that the exclusive right of the states to collect inheritance taxes is so sacred that it is worth supporting even at the cost of rendering the states unable to collect the taxes. But no less Pyrrhic a victory for states' rights is possible in this matter. The right of the states actually to benefit from inheritance taxation can be kept secure only by the intervention of the federal government.