"Death tax" repeal measure may change income tax, too
A reader who's active in the Oregon "death tax" repeal effort was asking our opinion yesterday about whether the prospective ballot measure on the subject might have income tax consequences. We couldn't give her a legal opinion, but on a quick perusal, anybody with sharp eye can see that it probably would.
The text of the initiative measure, whose collected signatures are currently being reviewed, is here. It forbids any government unit in Oregon from imposing any "Death Tax," which it then goes on to define very broadly:
Section 2. Except as provided in sections 3 and 6 of this 2012 Act, neither the State of Oregon nor any other unit of government in Oregon shall impose a Death Tax....
Section 4. A Death Tax is:
a. Any tax imposed on the estate of any decedent, or
b. Any inheritance tax, or
c. Any tax imposed on the transfer of property, or any interest therein, to any person, where the transfer is a result of the death of a person, or
d. Any tax imposed on the transfer of property, or any interest therein, from one family member to another family member, where the family relationship between the transferor and the transferee is within the third degree of consanguinity.
It's section 4(d) that jumps right out at us. Say a taxpayer sells Oregon property at a large gain to her niece. The two of them are not close to each other, and the sale price is negotiated at arm's length. Under current law, the aunt's gain is subject to Oregon income tax. But under the measure, would it be? You could certainly argue that it wouldn't be, because to tax it would be to impose a "Death Tax" -- a tax on a transfer of property between family members within the third degree of consanguinity.
If the Oregon income tax is pre-empted by the ballot measure in such a case, the state income tax results and the federal income tax results would be different. Whatever the aunt saved in Oregon taxes, the niece may eventually have to pay to an accountant, because the niece may have to keep two income tax bases in the property she bought. If it's depreciable property, like a rental house, dual accounting would get messy quick.
Even if you think the Oregon estate tax should be repealed -- it's so easily avoided for most folks that it's almost silly -- you can do it without tinkering with the income tax. But this ballot measure is so broadly worded that such mischief certainly seems possible.
On the other hand, maybe the income tax wouldn't be considered a tax "on the transfer," since it taxes only the aunt's gain and not the full value of the property. That seems like an awful stretch of the ballot measure's words, however, and if there's any doubt about what the words mean, it's one more reason to vote no -- on top of all the other ones that the public employee unions will soon be wheeling out.