Wednesday, June 16, 2010

PA Inheritance Tax as Law Review Subject

The Pennsylvania Inheritance Tax rarely is the subject of law review articles. But the most recent issue of the Penn State Law Review (Volume 114, Issue 3), published by The Dickinson School of Law of Penn State University, contains an excellent article (known as as a "Comment") on the subject.

Timothy J. Witt (J.D. 2010, Penn State) published Individuals and Inheritance Taxes: A Praxeological Examination of Pennsylvania’s Inheritance Tax, 114 Penn St. L. Rev. 1105 (2010) [PDF, pages 1105-1139], on April 19, 2010, as noted on that Law Review's website.

The author's introduction defines his subject and its treatment:
Much has been written regarding the economic effects of the federal estate tax, but relatively little has been published about state inheritance taxes and their economic consequences.
Additionally, what has been written has not been addressed primarily to a legal audience. The legal literature discussing the Pennsylvania inheritance tax, one of the eleven effective state inheritance or estate taxes found across the country, is no exception to this observation; beyond practice guides, few legal resources have discussed the tax, and virtually none have substantively and systematically examined its economic effects.

Furthermore, Pennsylvania's inheritance tax, like those of other states that have such taxes, has never been specifically analyzed in a legal context from the unique perspective of praxeology, an economic framework rooted in the study of individual human action.

This praxeological approach, with its recognition of “the market” as the aggregation of the actions and exchanges of individual persons, provides several significant and relevant insights into the nature of Pennsylvania’s inheritance tax. * * *
The article first provides a "brief introduction of both the history of Pennsylvania’s inheritance tax and praxeology," and then examines the Pennsylvania inheritance tax:
  1. in its current statutory form,
  2. as it would have been affected by a recent bill in the General Assembly, and
  3. in the extreme forms possibly permitted by the case law of both Pennsylvania and the United States Supreme Court.
In Part IV, this Comment outlines the economic effects of each of these three expressions of Pennsylvania’s inheritance tax in four praxeologically-significant categories:
  • ante-mortem capital accumulation,
  • ante-mortem capital flight,
  • post-mortem capital consumption, and
  • state revenue. [Reparagrphing applied.]
Consistent with his approach, the author notes that the "Comment advocates neither for nor against the Pennsylvania inheritance tax on the level of public policy."

The Comment analyzes one House member's attempt to phase out Pennsylvania's inheritance tax completely by 2012. House Bill 377 was introduced in November, 2007, by Representative Scott Perry (R) of the 92nd Legislative District.

That legislation failed, as did subsequent attempts to terminate the Pennsylvania Inheritance Tax. See:
PA EE&F Law Blog posting, New Attempts to Abolish PA Inheritance Tax (03/02/09).

Given the fiscal shortfall currently for the Commonwealth, and projected burdens on state taxpayers deriving from liberal retirement benefits promised to state workers, I believe that such legislation will continue to fail, as a matter of politics.

The author instead approaches the issue of repeal from an academic approach; and in this analysis, the practicing lawyer may fall away. However, the author's discussion offers a researched and rational approach to a difficult issue -- taxation of interests transferring upon death of an individual.

He concludes, generally:

With regard to Pennsylvania's inheritance tax, praxeology supports the conclusion that high inheritance tax rates would cause significant economic decline by fostering both capital consumption and capital flight, with a secondary effect being a decline in state revenue.

Likewise, under a praxeological examination, the Commonwealth's current inheritance tax causes some capital consumption and capital flight, albeit at levels insufficient to have presently created economic decline in Pennsylvania.

Repealing Pennsylvania's inheritance tax would foster additional economic growth through the increase of capital accumulation and a decrease in capital flight, which could have the contingent potential of increasing state revenue in the long term.

In terms of the debate over the Pennsylvania inheritance tax, the key praxeological insight is that the tax does not encourage economic growth. Rather, Pennsylvania's inheritance tax is something of a hindrance to economic expansion. * * * [Reparagrphing applied.]
Just how difficult an issue state taxation remains is demonstrated in another article that appears in the same law review issue. Jaime S. Bumbarger (J.D. 2010, Penn State) published Pennsylvania's Taxpayer Relief Act: Big Gamble Pays Off for Some, But Most Lose Their Shirt, 114 Penn St. L. Rev. 1004 (2010) [PDF, pages 1004-1018], which examines taxation of real estate in the Commonwealth.

For its case law citations on the topic alone, the law review's Comment about Pennsylvania Inheritance Tax is valuable. But it also adds a fresh analysis that could be considered by elected representatives who determine taxation upon decedents in the Commonwealth.