With the calendar page soon turning to April, we once more visit the days when we pause and reflect, mostly in head-shaking disbelief, at the amount of our labor that is appropriated by income taxes. While the sage once remarked on the certainty of death and taxes, he may not have appreciated the linkage of these phenomenon in the form of Pennsylvania's inheritance tax law.
Unlike the federal estate tax, Pennsylvania's inheritance tax is a charge to the heir — or surviving tenant in cases of joint ownership — for the right to receive the property of the deceased. All assets owned by the decedent including personal property such as jewelry, coin and stamp collections, antiques, paintings, vehicles, and cash as well as financial instruments (stocks, bonds, mutual funds, mortgage notes, bank deposits certificates) and real estate are subject to this tax.
It is tax on capital , as opposed to income, on the total value of non-charitable property bequests starting with the very first dollar, unlike the federal tax which exempts estates of less than $1 million.
INSATIABLE HUNGER
In the commonwealth's customarily anachronistic ways, Pennsylvania is one of only about a dozen states that still have such a tax on the books. In their insatiable hunger for revenue, governments contrive schemes to tax the same thing more than once, notably stock dividends, which are first included in taxable corporate income and then second as personal income of the individual shareholders. Here, Pennsylvania first taxes the income with which property is purchased (along with any earnings generated by the property) then subsequently taxes the value of that same property when title transfers as a result of the death of its owner.
While taxing a single subject multiple times is bothersome enough, the most egregious aspects of the inheritance tax deal with the statute's apparent conflicts with both the Pennsylvania and United States Constitutions.
The inheritance tax statute 72 P.S. 9116 specifies that the tax rate on a surviving spouse is 0 percent, 4.5 percent on a lineal descendant, (unless the lineal descendent is less than 21 years old in which case it is 0 percent), 12 percent on siblings and 15 percent on "collateral heirs.”
However, Article 8, Section 1 of the Pennsylvania Constitution requires that: “All taxes shall be uniform upon the same class of subjects, within the territorial limits of the authority levying the tax”
Since the inhabitants of the commonwealth are citizens, the phrase "class of subjects'" cannot be interpreted as referring to individuals or groups of people. So the phrase must then reference the thing which is being taxed and therefore the rate variability conflicts with uniformity requirement of that article. Given that the state Supreme Court cited this same article in its ruling prohibiting a graduated state income tax, it appears that rate variability of the inheritance tax should be subject to similar constitutional question.
THIS IS 'RATIONAL'?
In addressing questions concerning a law's constitutionality, Prof. Mark Yochum, a member of the faculty at the Duquesne University School of Law indicated that: “ … if it is rational in gross, the statute is constitutional. Remember too there is a presumption of constitutionality that the challenger must overcome by proving that the statute is irrational.”
Consider the matter of rationality in the following illustration of the result of the inheritance tax relationship based rates: Say that the deceased has bequeathed a portrait of himself to his closest surviving relative. The state assesses the tax for the heir right to receive the property. If the portrait is of the heir's father, the tax is 4.5 percent of its appraised value, if it's his brother, 12 percent. But if it is his uncle, why then the charge is 15 percent .
One may be single and have nieces and nephews who are as close and beloved as one's own children would be. But, because they are not “lineal descendants,” the state entitles itself to a threefold greater share of their bequest than if their blood was a greater fraction of their benefactor's.
Aside from issues of collecting revenue, the philosophical and historical basis for a tax on inherited capital and assets is purportedly to reduce concentrations of wealth in succeeding generations so as to achieve the objective of a more egalitarian society. So, if that is indeed the premise of the tax, then rationality suggests that the rates should be lower for those of more distant relation — or of no relation whatsoever — to the deceased. In fact, as cited above, the statutory rates run completely opposite this logic.
Additionally, there seem to be reasonable questions concerning the state's inheritance tax with respect to 14th Amendment (Section 1) of the U.S. Constitution which requires that: "No state shall make or enforce any law … nor deny to any person within its jurisdictions the equal protection of the laws."
The conflict lies in the rates depending solely upon the degree of relationship between the deceased and the heir. With no other rationale, such as the “ability to pay” which is used to justify progressive rates of income tax, the relationship basis of the inheritance tax appears discriminatory.
HOBSON'S CHOICE
Compliance with the law entails both payment and completion of the state inheritance tax return (Form REV 1500). Reporting requires that the executor enumerate particulars and details of all assets of the deceased, including jointly owned assets with account numbers of financial assets and the identity of the institution in which they are held. Quoting from form REV 1500:
“The statute does not exempt a transfer from a surviving spouse from tax, and the statutory requirements for disclosure of assets and filing a tax return are still applicable even if the surviving spouse is the only beneficiary”
So, even in the case of spousal transfers, where no tax payment is due , the survivor is placed in the position of either ignoring the reporting requirements — which carries the liability of a Class 3 misdemeanor charge — or surrendering one's Fourth Amendment — “the right of the people to be secure in their … papers and effects against unreasonable searches …” — since the inheritance tax return demands disclosure of information that is confidential between a financial institution and the account holder(s) and makes a record of such sensitive information.
One legal scholar opines that the: “Fourth Amendment or the Fifth Amendment has no application here, there is no search.” However, signing and filing the inheritance tax return — which requires the Social Security number of the decedent — may prompt a “compliance audit,” which is simply a euphemism for a search. Income tax critics have argued that its payer signature requirement on the return form is tantamount to a waver of Fifth Amendment protections against self-incrimination. Is a signature on any tax form an implicit surrender of Fourth Amendment rights?
The scholar continues: “The notion that financial privacy is ancient has no legal or historical basis. ” If his assertion is accepted, one must ask: What then is protected by the “right of the people to be secure in their … papers and effects”?
Though the questions raised above appear to be to be worthy of judicial review, regrettably legislators, seeing such oversight as the province of the courts, frequently neglect their duty and responsibility to re-examine and to change or totally eliminate bad laws.
In addition to all of the questions raised herein and regardless of the outcome of such questions in judicial review, Pennsylvania's inheritance tax law is a loser — it costs at least as much to collect and administer as the revenue it raises. If for no other reason than this, the Pennsylvania inheritance tax deserves to be scrapped.
C.J. Durkin, an electrical engineer and private pilot with a keen interest in returning government at all levels to its constitutional foundations, lives in Castle Shannon.
