Interstate Competition and State Death Taxes: A Modern Crisis in Historical Perspective

Abstract

Interstate competition has impacted state death taxes since their inception. The keys to understanding the challenges confronting modern state death taxes thus may lie in a study of their history. Yet what little modern literature exists relating to state death taxation largely has ignored the events preceding EGTRRA. This Article attempts to fill that void. 

In this analysis, I explore the history of interstate competition to attract and retain wealthy residents in an effort to help inform the debate as to how such competition will impact modern state death taxes. Although it is impossible to anticipate with certainty what state politicians will do in the future, I seek to offer guidance by placing the current climate in historical perspective and studying what past political leaders said and did when confronted with similar considerations.

The following sections of this Article approach this subject in chronological order. Part II covers the history of federal and state death taxation from 1797 through 1924, as governments tentatively experimented with this form of tax revenue. Part III turns to the crucial years of 1924 through 1926, when the states turned to Congress for help and Congress delivered the state death tax credit. Part IV studies the initial state responses to enactment of the state death tax credit, as states rapidly moved to incorporate the new credit into their state tax laws. Part V explores the longer-term state responses, focusing on two trends in state legislation that would imperil the future of state death taxes. Part VI brings the analysis to the modern day, post-EGTRRA, as a long-dormant competition begins anew between the states that impose death taxes and those that do not.

The conclusion reached from this analysis is a grim one for the future of state death taxes. The states with decoupled estate taxes now confront the same competitive pressures that plagued states seeking to impose death taxes prior to 1924. In the earlier era, Congress provided a bold solution in the form of the state death tax credit, preventing interstate competition from destroying the state death taxes. Now, that credit is gone. As such, it may be only a matter of time before modem state leaders resume where longforgotten predecessors left off, completing the migration away from death taxation and towards other forms of tax revenue. A new state tax landscape will thus emerge, shaped by pressures and influences that began not in 2001 but decades before.