(G) Tax Burden

As a result of all of the considerations noted above, wide interstate variations in tax burden still remain. The main purpose of the crediting provision of the Federal Revenue Act of 1926 was to equalize the tax burden of the death duties between the various States. It was desired that this be done in order to eliminate competition between States which, by reduction and even complete elimination of death duties, were bidding for wealthy residents. This competition was forcing State death duties into non-productivity at the time that the crediting provision was passed. Insofar as State-by-state variations in tax burden still remain, competition for wealthy residents has not been eliminated and the crediting provision has not achieved its ends.

To obtain comparable tax burden data for the entire country the Division of Research and Statistics of the Treasury Department submitted a questionnaire regarding twenty estates of varying size to the death tax administrators of the various States. Replies have thus far been tabulated from 23 States. These are summarized in the accompanying table. The questionnaire revealed that the effective rates of taxation range from zero to 1.5 percent on $10,000, $15,000 and $20,000 estates, from zero to 3.4 percent on $50,000 estates and from zero to 4.95 percent on $100,000 estates. In the case of estates in excess of $100,000, no less conspicuous variations remain, the crediting provision notwithstanding. Thus, the effective rates of taxation on $50,000, $5,000,000 and $50,000,000 estates range, respectively, from 1.38 percent to 8.89 percent, from 2.14 percent to 20.25 percent and from 2.16 percent to 22.73 percent. Data for the remaining twenty States are not likely to reveal lesser variations. Suffice it to observe that the crediting provision has far from equalized the death tax burdens imposed by the various states.

Effective rates of death taxes in selected States on estates of specified size

Computed on the basis of data secured by questionnaire to the several States

(Size of estates in thousands of dollars)

State             $10    $15    $20     $30     $40     $50     $65

Alabama             -      -      -       -       -       -       -
California        .28    .29    .30     .31     .31     .33     .38
Connecticut       .20    .34    .55     .75     .98    1.20    1.17
Delaware          .45    .52    .61     .72     .79     .83     .92
Florida             -      -      -       -       -       -       -
Georgia             -      -      -       -       -       -       -
Illinois          .90    .93    .95     .97     .98     .98    1.17

Kentucky          .90    .90    .90     .98    1.25    1.53    1.90
Massachusetts       -    .88    .88    1.32    1.32    1.60    1.61
Michigan          .90    .90    .90    1.00    1.09    1.18    1.28
Mississippi         -      -      -       -       -       -     .10
Missouri          .65    .70    .73     .83     .89     .97    1.02
Montana          1.10   1.33   1.50    1.67    1.75    1.90    2.14
Nebraska          .40    .40    .40     .40     .40     .45     .54

New Hampshire    1.50   1.50   1.50    1.50    1.50    1.50    1.50
New Jersey       1.17   1.20   1.28    1.42    1.52    1.59    1.66
New York            -      -      -     .15     .20     .25     .36
North Carolina   1.08   1.08   1.12    1.23    1.38    1.46    1.60
North Dakota      .36    .30    .43     .61     .73     .80    1.17
Ohio              .61    .71    .81    1.10    1.28    1.38    1.48
Oklahoma          .08    .11    .13     .23     .55     .90    1.32

Oregon            .20    .70    .95    1.35    1.64    1.85    2.21
Rhode Island        -    .50    .75    1.00    1.13    1.20    1.28
Utah                -   1.00   1.50    2.33    3.00    3.40    3.85
Virginia            -    .14    .31     .58     .75     .87     .98
Washington        .50    .50    .50     .62     .73     .79     .87
Wisconsin        1.02   1.28   1.46    1.77    1.78    1.98    2.20
Wyoming           .54    .54    .54     .54     .61     .79    1.00

State             $75   $100   $125    $150    $200    $250    $300

Alabama             -      -    .08     .19     .44     .72     .96
California        .39    .47    .55     .66     .85     .98    1.09
Connecticut      1.49   1.64   1.72    1.83    2.07    2.22    2.38
Delaware          .98   1.07   1.13    1.22    1.40    1.52    1.65
Florida             -      -    .08     .19     .44     .72     .96
Georgia             -      -    .08     .19     .44     .72     .96
Illinois         1.25   1.49   1.69    1.86    2.20    2.52    2.76

Kentucky         2.09   2.63   3.15    3.61    4.28    4.75    5.17
Massachusetts    1.83   1.93   2.10    2.37    2.72    3.06    3.34
Michigan         1.33   1.52   1.68    1.82    2.10    2.30    2.47
Mississippi       .19    .32    .48     .71     .96    1.21    1.52
Missouri         1.05   1.09   1.16    1.19    1.32    1.58    1.76
Montana          2.33   2.65   2.94    3.27    3.73    4.12    4.72
Nebraska          .58    .65    .77     .85     .97    1.08    1.15

New Hampshire    1.50   1.50   1.50    1.50    1.50    1.50    1.50
New Jersey       1.69   1.74   1.77    1.82    1.93    2.02    2.12
New York          .43    .55    .62     .67     .88    1.16    1.42
North Carolina   1.71   1.93   2.16    2.35    2.67    2.93    3.37
North Dakota     1.49   2.28   2.90    3.43    4.37    5.12    5.93
Ohio             1.53   1.59   1.80    1.90    2.03    2.14    2.23
Oklahoma         1.60   2.20   2.66    3.02    3.50    3.90    4.17

Oregon           2.37   2.88   3.74    4.32    5.04    5.47    5.84
Rhode Island     1.33   1.43   1.51    1.59    1.71    1.82    1.89
Utah             3.93   4.95   5.56    6.30    7.23    7.78    8.15
Virginia         1.03   1.11   1.16    1.22    1.34    1.44    1.58
Washington        .94   1.07   1.16    1.35    1.59    1.81    2.16
Wisconsin        2.39   2.69   2.97    3.29    3.75    4.14    4.73
Wyoming          1.10   1.30   1.47    1.59    1.73    1.82    1.87

State                   $400   $500  $1,000  $5,000 $10,000 $50,000

Alabama                 1.38   1.74    3.10    7.74   10.62   14.92
California              1.26   1.38    2.45    4.71    5.26    8.52
Connecticut             2.71   2.90    3.30    7.74   10.62   14.92
Delaware                1.89   2.06    3.10    7.74   10.62   14.92
Florida                 1.38   1.74    3.10    7.74   10.62   14.92
Georgia                 1.38   1.74    3.10    7.74   10.62   14.92
Illinois                3.15   3.52    5.42   12.14   13.51   13.81

Kentucky                5.80   6.30    7.90   11.80   13.51   15.48
Massachusetts           3.74   4.00    4.81    7.74   10.62   14.92
Michigan                2.70   2.86    3.44    7.74   10.62   14.92
Mississippi             1.94   2.24    3.49    7.90   10.72   14.94
Missouri                2.29   2.62    3.48    7.74   10.62   14.92
Montana                 5.51   6.11    8.01   10.56   10.88   14.92
Nebraska                1.38   1.74    3.10    7.74   10.62   14.92

New Hampshire           1.50   1.74    3.10    7.74   10.62   14.92
New Jersey              2.31   2.53    3.40    7.74   10.62   14.92
New York                1.89   2.29    3.88    9.68   13.27   18.65
North Carolina          3.53   3.72    4.90    7.74   10.62   14.92
North Dakota            6.95   7.77   11.05   20.25   21.63   22.73
Ohio                    2.14   2.58    3.15    7.74   10.62   14.92
Oklahoma                4.50   4.70    5.10    7.74   10.62   14.92

Oregon                  6.88   7.51   10.75   17.55   18.53   19.31
Rhode Island            2.00   2.07    3.10    7.74    10.2   14.92
Utah                    8.61   8.89    9.45    9.89    9.94    9.99
Virginia                1.86   2.07    3.10    7.74   10.62   14.92
Washington              2.59   3.03    4.50    6.64    6.95    8.52
Wisconsin               5.52   6.12    8.01   11.56   10.62   14.92
Wyoming                 1.95   1.99    2.07    2.14    2.15    2.16

(H) Dual Tax Administration

One of the serious deficiencies of the crediting device is its failure to eliminate dual administration. States are still required to maintain independent estate tax administrative organizations and taxpayers are still liable for the filing of both Federal and State death tax returns. Some degree of coordination has been achieved in eight States by requiring the filing of a duplicate of the Federal return. In three of these the State tax is computed on the basis of the Federal return and no additional State return is required. The remaining five require a duplicate of the Federal return in addition to the independent State return. Obviously the necessity for duplicate returns must remain as long as State taxes differ structurally from those imposed by the Federal Government.

(I) Further Interstate Variations

That the crediting device has not exerted as great an influence upon State taxation as is generally believed, may be deduced from a comparison of the amount of credits claimed for taxes paid to States against the Federal estate tax liability with the amount of inheritance and estate tax revenue collected by the States. If it is true that the crediting provision has had the effect of equalizing death taxes imposed by States, then the amount of credits claimed for taxes paid to States against the Federal estate tax liability under the 1926 Act should approximately equal 100 percent of State death tax collections. While the two series are not strictly comparable, they are sufficiently so to be of significance, particularly if the comparison is based on data for a number of years.

Ratio of State credit to State death tax collections, 1930-1936 Distribution of States by percentage intervals

Percentage intervals

Under 20

Utah                               8.50
N.D.                              10.53
Iowa                              11.72
S.D.                              13.13
Idaho                             15.03
N.M.                              15.22
Arkansas                          17.55
Kansas                            17.56

20 - 29.9

Wyoming                           23.51
N.H.                              25.55
S.C.                              25.63
W. Va.                            27.94
Wisc.                             28.78
Tenn.                             28.89
Montana                           29.22
Vermont                           29.36

30 - 39.9

Arizona                           30.14
Oregon                            30.73
Louisiana                         33.15
Pa                                33.86
Ind.                              34.22
Washington                        35.26
Colorado                          38.73
Missouri                          39.10
R. I.                             39.30
Nebraska                          39.43

40 - 59.9

Calif.                            40.57
Ky.                               40.82
Ohio                              40.87
Minn.                             43.36
N. C.                             43.83
Delaware                          45.49
Ill.                              45.64
Mass.                             47.25
Conn.                             52.10
Md.                               52.62
Okla.                             54.31
Va.                               54.37
N. J.                             57.25
Texas                             59.38

60 and over

Maine                             60.26
New York                          63.87
Michigan                          64.49
Miss.                             73.85
Georgia                           74.59
Florida                           91.34
Alabama                           92.42

A comparison of credits claimed against Federal taxes with State tax collections during the seven-year period 1930-1936 reveals a range from less than 10 percent in one State to 92 percent in another. In seven States credits claimed represent between 10 percent and 20 percent, in eight between 20 percent and 30 percent, in ten between 30 and 40 percent, in fourteen between 40 and 60 percent, and in seven over percent of State death tax collections. For the nation as a whole, credits claimed represent less than 50 percent of State death tax collections. In other words, States, instead of confining their taxes to 80 percent of the federal schedule under the 1926 Federal Act, have in fact imposed taxes more than twice as high.

A different approach to the evaluation of the present crediting provision is offered by an examination of the effectiveness of the differential estate taxes passed by the various States in order to take advantage of the available credit. Differential estate taxes, designed to absorb the difference between State death taxes and 80 percent of the Federal tax imposed under the 1926 Act are now on the statute books of thirty-one states. It has already been indicated that in no instance are these levies operative on net estates amounting to $100,000 or less. Detailed data available for nineteen of these thirty-one States reveal, furthermore, that the effectiveness of the differential levies is confined to comparatively few instances. In the case of two States, Kentucky and New York, they are never operative because the death taxes in these States amount to more than 80 percent of the Federal 1926 estate tax upon all estates including those amounting to $50,000,000. New York's rates are consistently 25 percent above the maximum credit. Kentucky's rate structure begins with a $90 tax on $10,000 estates and reaches $3,931 on estates of $125,000, on which the State credit applicable to the Federal tax amounts to only $100. While the differential is gradually reduced as the size of the estate increases, Kentucky taxes are more than four times as large as the State credit on $400,000 estates and even on $50,000,000 estates amount to 104 percent of the State credit allowed against Federal tax liability trader the 1926 Act. The crediting provision in this instance can thus be said to be wholly inoperative as an equalizer.

Effective range of the differential estate tax in selected States computed on the basis of questionnaire submitted to the several States

(Value of estate in thousands of dollars)

State               400   400  500  1,000   5,000   10,000   50,000

California                                                      X
Connecticut                                   X        X        X
Delaware                              X       X        X        X
Massachusetts                                 X        X        X

Michigan                                      X        X        X
Missouri                                      X        X        X
Montana                                                         X
Nebraska                   X    X     X       X        X        X
New Hampshire                   X     X       X        X        X

New Jersey                                    X        X        X
New York
North Carolina                                X        X        X
Ohio                                          X        X        X
Oklahoma                                      X        X        X

Rhode Island                          X       X        X        X
Virginia                              X       X        X        X
Washington                                    X        X        X
Wisconsin                                              X        X

In the case of California and Montana, the differential levy becomes operative only on estates of $50,000,000; in nine States, on estates amounting to $5,000,000 or more; and in only one State on estates amounting to $400,000. In none of the nineteen States for which data are available is the differential levy operative on estates of less than $400,000. In other words, it is inoperative in the estate groups in which the majority of the estates fall. The net result is that tax burdens continue to vary between States. A field for interstate competition remains. The present crediting provision is not sufficiently broad in scope to promote interstate uniformity and equity.

Partly as a result of variations in tax burdens but primarily because of interstate variations in taxable wealth, the significance of death taxes in the revenue structures of the various States is in no sense uniform. In 1936 State death taxes, amounting to $113,793,000 accounted for 5.56 percent of all State tax collections. In the case of individual States, their relative significance ranged from zero in Nevada and 0.30 percent in Arizona to 21.39 percent in New Jersey./10/ Death taxes produce less than 1 percent of the tax revenue in thirteen States, between 1 and 2 percent, 2 and 3 percent, 3 to 4 percent each in seven States, between 4 and 6 percent in five States, between 6 percent and 9 percent in four States, and over 9 percent in four States. They are of greatest relative significance in industrial States./11/

State death tax collections as percentage of total State tax collections, 1936

(Distribution of States by percentage intervals)

Under 1%

Arizona                            .30
N. Mex.                            .33
Georgia                            .38
Alabama                            .43
Ark.                               .44
Idaho                              .47
Wyo.                               .51
Miss.                              .54
Montana                            .71
N. Dak.                            .71
S. Dak.                            .72
Nebraska                           .76
La.                                .94

1% - 2%

N. Car.                            1.01
Ky.                                1.04
Okla.                              1.24
Texas                              1.26
S. Car.                            1.31
Wash.                              1.63
W. Va.                             1.83

2% - 3%

Utah                               2.16
Minn.                              2.18
Va.                                2.30
Ohio                               2.45
Kansas                             2.55
Tenn.                              2.96
Ill.                               2.97

3% - 4%

Mich.                              3.06
Ind.                               3.08
Iowa                               3.21
Oregon                             3.30
Maine                              3.69
Col.                               3.78
Mo.                                3.79

4% - 9%

Vermont                            4.01
N. Hamp.                           4.23
Calif.                             4.29
Md.                                5.25
Del.                               5.86
Conn.                              6.98
Wis.                               7.90
R.I.                               8.11
N.Y.                               8.29

Over 9%

Penn.                             11.01
Florida                           11.37
Mass.                             12.41
N.J.                              21.39

In view of the existing variation in State taxation of property transfer, WHICH, as has been observed above, permeates all aspects of State death taxes, the conclusion is inescapable that the crediting provision originally introduced in 1924 and subsequently expanded in 1926, is not in itself adequate for the elimination of interstate competition and Federal-State conflict in death taxation.

(4) Proposals For The Coordination Of Federal And State Taxes On Property Transfers

The numerous proposals which have been advanced during the past few years for the elimination of the conflict between Federal and State taxation of property transfers, fall into three general categories: (A) Separation of revenue sources, (B) modification of the crediting device, and (C) Federal-State integration.

In examining the relative merits of the various proposals, certain objectives must be kept in mind: (a) That any change in Federal-State relations does not unduly reduce Federal revenues; (b) that it increase substantially, or at least moderately, State revenues; (c) that it not be coercive upon the States; (d) that it be of a type which can go into effect gradually and not be conditional upon the enactment of specific kind of legislation in all of the States; (e) that it disturb as little as possible the death tax legislation now on the books of the States, inspired in part by the Federal Government's crediting device; and (f) that it minimize as far as possible the need for dual administration on the part of fiscal authorities and dual compliance on the part of taxpayers.

(A) Separation Of Sources

Those who advocate the separation of revenue sources between the Federal Government on the one hand and the States on the other, suggest two general plans: Either that the Federal Government or the States take over the entire death tax field, leaving the other similarly exclusive jurisdiction with reference to some other tax or that the death tax field itself be divided between the Federal Government and the States, the former taxing large estates and the latter small estates.

The "separation of revenue sources" proposal has been advocated by the President. On January 14, 1932, while Governor of New York, be spoke as follows at the New York City Democratic Victory Dinner:

The time has come for the 48 sovereignties which have created the federal machinery of government to say to Washington: Let us follow the original principle established in the Constitution in 1787: That the states give to the federal government certain specific powers and reserve to themselves all other powers. Apply that to the great problem of taxation. We, the 48 sovereignties, must say to each other and to the federal government, let us counsel together; let us establish for times of peace a definite apportionment of the whole field of taxation. To the federal government we will give adequate sources of taxation to meet the administrative needs of the federal government as a government of definite delegated powers. All other sources of taxation we, the states, reserve unto ourselves. When that is accomplished it will be possible for the state sovereignties to scan this reserved field of tax sources and to determine which elements in that field can with propriety and justice be allocated as tax sources to local government to cities and counties and villages and towns.

Furthermore, and of equal importance, by dividing and clarifying the tax sources of government, we shall lift from the backs of legitimate enterprise burdens which in many cases are unfair and inequitably distributed. I have an example immediately at hand. This very week I have recommended to the legislature of this State four sources of additional revenue, each one of them an increase in existing taxes. Neither I nor the legislature has any knowledge of whether the federal government a month or two hence may or may not impose taxes on precisely these same sources. In the same way, neither the legislature nor I can, until this uncertainty is cleared up, take any practical steps to turn over any of our own tax sources to the local government units to help them out in the conduct of their local affairs. Even if the state were to allocate new tax sources to the cities or counties or towns, the whole system could be destroyed over night by a sudden taxing of those same sources by Washington.

The President's statement was, no doubt, provoked by practical difficulties encountered in raising State revenues during his gubernatorial experience. It may also be conceded that separation of sources would eliminate dual administration and dual compliance. There are, however, obstacles not revealed by the President which bulk large in the path of such a proposal. The cooperation of the States which such a procedure involves could not readily be obtained and would certainly be time consuming.

Even more serious is the difficulty which would be encountered in the correlation of the distribution of revenue sources with the allocation of governmental functions. On this point Haig stated:

If the taxes were assigned to those Jurisdictions which can best administer them with no provision for transfers of part of the yield, and if the functions of government in general were distributed by the same test of efficiency, it is almost inconceivable that the resulting patterns of costs and revenues would be even approximately identical. If, by some freak of fortune, they would chance to be so at a given moment, changes either in governmental functions or the conditions which govern efficiency in administration would immediately destroy the identity. As a practical matter, either efficiency in the administration of taxes or efficiency in the performance of other governmental functions would have to be sacrificed on the altar of the balanced budget. This difficulty is not an imaginary one. The experience with the device of separation of sources in such states as California brilliantly illuminates the point. The task of making a federal-state plan of separation flexible and adaptable to constantly changing conditions is substantially more difficult than the corresponding task in the state and local sphere (N. T. A. Proceedings, 1932, page 229).

These considerations prompt the conclusion that the "separation of sources" idea in itself offers little opportunity for the solution of the problem of conflicting taxation. Accordingly, in the following section attention is directed to other possible methods of coordination.

(B) Modification Of Crediting Device

The proposals for the modification of the present crediting provision have been generally prompted by the conviction that the amount of revenue currently derived by States from death taxes is insufficient. Accordingly, Walradt recommends that the amount of credit for State taxes be increased from 80 to 85 or 90 percent of the tax liability under the 1926 Act. Haig, on the other hand, recommended that the 80 percent credit for State death taxes be applied to the entire yield of the Federal estate tax, not merely to that portion of it collected under the 1926 Revenue Act. Others have urged an expansion of the crediting provision to the gift tax.

All of these proposals, it will be observed, would apply a flat credit against Federal estate tax liability on all estates irrespective of size. As an alternative the Commission on Conflicting Taxation suggests that administrative, economic and fiscal considerations point to the desirability of allotting to the States a larger share of the revenue from small estates than from large estates. The contention is supported by the fact that small estates can be more easily assessed by States, that large estates are in the main accumulated and invested in interstate enterprise making them national in character, and that State taxation of occasional large estates produces unpredictable fluctuations in revenues. Accordingly, it has been suggested that the crediting plan be graduated giving the States the greater part of the tax on estates under $200,000 and allow the Federal Government to retain most of the tax levied on that part of estates in excess of $1,000,000. A graduated scale of credits has also been urged by the New York State Commission for the Revision of Tax Laws, which recommended a scale of graduation with seven brackets, permitting a credit of 80 percent on estates up to $150,000 and declining to 20 percent on estates above $10,000,000. In the interest of simplicity, J. W. Martin, now Commissioner of Revenue for the State of Kentucky, suggests the use of three brackets, 75 percent credit on the first $100,000, 50 percent on that part of all estates between $100,000 and $1,000,000, and 25 percent on that part of estates above $1,000,000.

In reference to all of these proposals, it should be observed that no modification of the crediting provision can eliminate the necessity for dual administration and, in most cases, dual compliance on the part of taxpayers. In addition, any modification of the crediting provision would interfere with State legislation which was designed to secure advantage of the 80 percent credit now available under the 1926 act. This, it should be observed, is a significant consideration because twenty-two State laws designed to absorb the credit permitted against Federal taxes, are specifically stated in terms of 80 percent of the 1926 Federal levy. Thus, a change in the amount of the credit would automatically invalidate all of these State statutes and call forth a full complement of others. Furthermore, the extension of the crediting device to the gift tax would force upon the States the prompt enactment of State gift taxes, adding thereby to problems of administration and tax compliance. On the other hand, the probability of loss of Federal revenue need not unduly concern us here, since, as pointed out in the preceding Parts I and II, numerous opportunities are available for the revision of the Federal estate and gift tax which are adequate to compensate for any loss of Federal revenue that may result from a minor modification of the crediting device.

(c) Federal-State Integration

The third category of proposals would integrate Federal and State death taxes. These are of a wide variety. At one extreme is the proposal that death taxes be administered by the States and that the Federal Government be permitted to requisition these States for such funds as it requires. This, it will be recognized, is the discredited method of the old Confederation. More frequently, it is suggested that death taxes be administered by the Federal Government with one of the following conditions: (1) with State-sharing in the revenue, (2) with Federal grants-in-aid to the States, (3) with individual State additions to the Federal levy, both to be Federally administered, or (4) with the retention of all of the revenue by the Federal Government together with Federal assumption of responsibility for the financing of some function now financed by the States. With respect to these proposals, it should be observed that all but the one designated as (3) could become operative only after appropriate action has been taken by all States. They would be inoperative, in other words, so long as a single State stayed off the "band wagon." The coercion involved would be particularly distasteful because States have been inclined to view death taxation as their own rather than the Federal Government's prerogative. With respect to number (3), dealing with Federally-administered State additions to the Federal levy, it is concluded that the wide latitude it affords the several States, particularly in the event of its piecemeal adoption, is likely to enhance rather than reduce interstate conflict.

(5) Recommended Procedure For The Coordination Of Federal And State Death Taxes

While none of the proposals considered above can individually solve the problem of Federal-State conflict in the field of death taxation, a combination of two of the methods appears workable. Specifically, it is suggested that an attempt be made to eliminate the existing conflict in death taxation by a combination of the present crediting device with a Federally-administered locally-shared system of death taxation. This can be achieved by providing an option as follows: Those States which continue to levy their own inheritance estate taxes may continue to take advantage of the 80 percent credit allowed against Federal taxes under the 1926 Act. Those States, on the other hand, which will abolish their own death taxes may receive in lieu of the estate tax credit a fixed proportion, say 25 percent, of Federal estate and gift tax collections in their individual States. Since it is desired to encourage discontinuance of State taxes upon property transfers to eliminate dual administration and dual tax compliance, the revenue allocated the majority of the States under the second of the options should be substantially greater than that accruing to them under the operation of the crediting provision and should in fact be as great as that which they now derive from death taxes.

The adoption of this optional arrangement is believed to possess numerous advantages. In the first place, it provides a gradual transition from the existing situation and can therefore go into operation immediately and need not be postponed until such time as appropriate legislative action has been taken by all of the States. Secondly, the arrangement is in no sense coercive upon the States, but will obviously be attractive to the States. Thirdly, it will eliminate the necessity of separate State administration and dual estate tax compliance without loss of State revenue. Fourthly, it will necessitate no new State legislation, either in estate or gift taxation, but rather will produce a gradual repeal of existing legislation.

Furthermore, the proposed coordinating device would contribute to the solution of the problem of State Jurisdiction with respect to death taxation. While the jurisdictional problems arising in connection with the administration of State death taxes have Been greatly simplified during the past few years as a result of such Supreme Court decisions as that in the First National Bank of Boston vs. Maine, 284 U. S. 312, uncertainty and conflict still remain. In general, transfers of real estate are taxable by the State in which the property is located and tangible property is taxable at the place where it has an actual situs at the time of the owner's death. Intangible property is taxable by the State in which the decedent had his residence, unless it has acquired a business situs elsewhere. However, the question of business situs for intangibles is still unsettled. Furthermore, domicile with reference to intangibles is subject to State sovereignty. In consequence, variations exist producing undesirable double taxation. The Dorrance estate is a recent case in point. Because of the lack off coordination Pennsylvania and New Jersey, counter-claimants as to Dorrance's domicile, were able to collect, the one $27,000,000 and the other $15,620,800 from the same estate, both admitting at the same time that logically a man can be a domiciliary resident of but one State. Nevertheless, it appears that a man for tax purposes can be held to possess domicile in two or more States. This jurisdictional problem would be eliminated were the Federal Government the sole agency levying a death duty in the United States as is in fact here recommended. The problem would then resolve itself into one of distribution to be determined by fair and impartial rules of domicile, rules which would not be subject to interstate conflict but rather to the impartial scrutiny of the Federal Government.

Cognizance should also be taken of the fact that the coordination of the Federal and State taxes on property transfers as here proposed would greatly enhance general acceptability of the contemplated revisions of the Federal estate and gift taxes themselves. The realization that in revising these two Federal taxes provision has been made for the gradual elimination of the corresponding State levies with their added inconvenience and burden, and for their replacement by a diversion of some of the Federal revenue to the States, would be certain to result in wide public support.

Finally, the proposed arrangement will provide for a gradual simplification of the Federal estate tax structure itself. The computation of present Federal estate tax liability is excessively cumbersome involving two rate schedules, one enacted in 1926, the other in 1935. Since the first of these serves only the purpose of determining the maximum amount of credit which may be claimed for taxes paid to the States, the need for its existence will gradually diminish as the various States abolish their own death taxes in order to qualify for State sharing of Federal revenue.

From the point of view of the Federal Government, the disadvantage of the proposal lies in the fact that it will serve to transfer some revenue to the States which otherwise could be retained for Federal purposes. For that reason steps taken in the direction of Federal-State coordination must be accompanied with a structural revision of the estate tax and a coordination of the estate and the gift tax. In this connection it may be pointed out that the revisions recommended in the two foregoing sections will be more than adequate to compensate for the increase in the amount of revenue which would be diverted to the States.

States are now deriving approximately $100,000,000 a year from death taxes. Thus, the amounts diverted to them under the proposed arrangement would at least have to equal that amount. In reality it would have to substantially higher, partly because it will have to be demonstrated that financially the States stand to Benefit from the second option and partly because the amounts set aside for State sharing will have to be high enough to attract most of those States which now impose especially high taxes of their own. That will automatically increase the sums allocated to all of the other States. It should be observed, however, that the amount which will be diverted to the States under the proposed arrangement will not represent a net reduction from Federal revenue because part of it is already deducted in the form of credits against Federal taxes for taxes paid to States. In 1936 such deductions amounted to $44,000,000. In a sense, too, the funds transferred to the States will have been derived from those revisions of the Federal taxes themselves which were in part made possible by the fact that they will enable the elimination of overlapping State transfer taxes. Furthermore, whether the proportion of estate and gift tax collections diverted to the States should be placed at 25 percent, or at some other figure, cannot be determined until the exact revisions of both taxes are definitely decided upon and the revenue significance of those revisions fully analyzed.

It may be expected that there will be some reluctance on the part of the States to cede their prerogatives respecting property transfer taxation to the Federal Government. It will be recalled that the States are wont to look upon this field of taxation as their preempted field; a view which, by its enactment of the crediting device, the Federal Government has itself indirectly sanctioned.

There are other considerations, however, which are certain to weigh more heavily with the States than theoretical prerogatives. First of all, the States realize that the problem of conflicting Federal-State taxation is largely their problem; that it is of secondary revenue significance to the Federal Government. Accordingly, they are prepared to promote any equitable device leading to the elimination of conflict. Secondly, the proposed device will eliminate interstate competition which the States full well realize has on previous occasions greatly deprived their inheritance and estate taxes of productivity. Thirdly, the proposed device will add substantially to the transfer tax revenues of most of the States. This is particularly true with those States which, because of their smallness, are incapable of imposing an effective property transfer tax. In the case of the three or four extreme States, no attempt need be made to equal present revenues, partly Because these are the States which are most eager to eliminate conflict and will therefore acquiesce to a minor revenue loss, and partly because the acceptance of the device by the other forty-four States will leave the remaining few little, if any, alternative. Furthermore, these extreme States are precisely those which are most sensitive to interstate competition and the possibilities of wealth migration.

On the other hand, the States will require some assurance that the proposed arrangement is moderately permanent. The Federal Government, however, should be prepared to give such assurance since it is here concerned with a tax ideally qualified for permanent and stable position in the Federal tax structure. Property transfer taxes affect accumulations spread over a lifetime and should therefore be stable. The estate of a person dying when rates are temporarily high is severely penalized in comparison with an estate taxable at some other time. The inequity is especially great because the property transfer tax is not levied annually but only once, at the time of death. Stable transfer tax rates not only promote equity but tend to encourage and enable property owners to protect their estates by providing readily liquid assets sufficient for the payment of transfer taxes. Fluctuating levies encourage individuals to postpone the planning of property transfers in the hope that taxes may be reduced. These considerations should enable the Federal Government to assure the States of the stability of the proposed coordinating device, which together with the above enumerated factors will render the proposed coordinating device more than acceptable to them.

In conclusion, too much emphasis cannot be placed upon the necessity of making a start in the direction of Federal-State tax coordination. That the entire problem cannot be solved with one clear sweep goes without saying. It follows that attempts at solution should proceed tax by tax. Death taxes offer a good starting point, partly because of their wide use as sources of State revenue but primarily because they present an opportunity for adding substantially to State revenues without a corresponding loss of Federal revenue. The resulting good will would contribute immeasurably to the solution of the Federal-State conflict in the other fields of taxation.

Table 1 Federal Estate Tax: Changes in Rates and Exemptions