Author:Juehring, Jenny L.


While state death transfer taxes (1) were once quite common, their prevalence has declined in recent years. When Congress enacted the modern federal estate tax in 1916, (2) all but five states and the District of Columbia already had some sort of death transfer tax. (3) By 1922, the number of states without a death transfer tax dropped to two plus the District of Columbia. (4) However, today only seventeen states and the District of Columbia still impose such taxes. (5) While their prevalence has declined, the impact of state death transfer taxes on those still subject to them has not. Some state death transfer taxes are discriminatory in nature because they apply a higher tax rate on certain death transfers than others, typically based on the heir's relationship to the decedent. (6) Additionally, state death transfer taxes tend to alter individual decision-making and create interstate competition for wealthy residents. (7) Further, state death transfer taxes impose a notable burden on death transfers without generating a significant amount of revenue. (8)

While there appears to be little justification for the continuance of state death transfer taxes, it is arguable that they serve an important purpose by combatting wealth inequality in society. (9) However, state death transfer taxes do not adequately address wealth inequality. (10) Until all states impose an identical state death transfer tax, which is unlikely and perhaps nearly impossible, problems of interstate competition and taxpayers altering their behavior to avoid death transfer taxes will persist." State death transfer taxes cannot adequately address wealth inequality and provide little remaining benefit. The few remaining state death transfer taxes are at their end. These remaining states should consider a gradual repeal of the death transfer tax, allowing time for taxpayers to make changes to their estate planning. (12)

Part I of this Note discusses the history and evolution of state death transfer taxes, including their rise, recent decline, and interaction with the federal estate tax, all of which are critical to understanding the current state of death transfer taxes and their imminent downfall. Part II examines the discriminatory effect of certain state death transfer taxes and the behavioral and revenue effects of all state death transfer taxes. Part III discusses the state death transfer tax's questionable role in combatting wealth inequality, and its limitations for serving as a workable solution to rising wealth inequality. Part IV of this Note proposes that states consider a gradual repeal of all state death transfer taxes, or at the very least reform those death transfer taxes that are discriminatory in nature. This Note concludes that the remaining death transfer taxes are near their end and should soon be repealed because of their inability to provide any benefit to remaining states with such taxes.


    1. History Before 1924

      The federal government instituted its first temporary death transfer tax in 1797. (13) Until the more permanent modern federal estate tax was enacted in 1916, (14) temporary death transfer taxes were imposed several times at the federal level, often in conjunction with wartime efforts. (15) Pennsylvania was the first to enact a state death transfer tax in 1826. (16) Between 1826 and 1885 a few other states also adopted death transfer taxes, but state adoptions were not widespread. (17) That changed in 1885 when New York enacted an inheritance tax on collateral heirs, (18) which led other states to enact similar death transfer taxes modeled on New York's tax. (19) The structure of state death transfer taxes around the end of the nineteenth century and beginning of the twentieth century ranged from a flat rate on collateral heirs to a progressive tax on both lineal and collateral heirs. (20)

      When Congress enacted the modern federal estate tax in 1916, (21) all but five states and the District of Columbia had a death transfer tax. (22) By 1922, the number of states without a death transfer tax dropped to two plus the District of Columbia. (23) In 1922, state death transfer taxes comprised roughly seven percent of total state tax revenues. (24) However, between 1916 and 1924, the few remaining states that did not have death transfer taxes began to try to lure residents with their favorable tax rates, creating interstate competition for wealthy residents. (25) States became worried about competing amongst each other for wealthy taxpayers. (26) This competition led to three national conferences where states attempted to figure out a solution that would allow them to continue to collect death transfer tax revenue while preventing the migration of wealthy residents. (27) The result of the three conferences was the Delano Committee Report, which proposed that the federal government pick up the cost of state death transfer taxation. (28)

    2. The 1924 Enactment of a Federal Credit for State Death Transfer Taxes

      In 1924, partly in response to the outcry from states following the enactment of the federal estate tax, (29) the federal government passed the Revenue Act of 1924. (30) The Act amended the Internal Revenue Code to provide a dollar-for-dollar credit on a federal estate tax return for state death transfer taxes paid. 31 This change allowed states to place the burden of their death transfer taxes on the federal government rather than on their residents, effectively eliminating interstate competition. (32) During a hearing regarding the Revenue Act of 1924, Senator Jones of New Mexico asked, "[W]ould it not be equitable for the Federal Government only to lay its hand upon that part of the inheritance after all State taxes and expenses have been deducted, regardless of the amount?" (33) This statement indicates that at least one member of Congress supported the enactment of the credit as a form of deference to state death transfer taxes. (34)

      The credit was initially capped at twenty-five percent of the federal estate tax, (35) but the cap was raised in 1926 to eighty percent. (36) Iowa Congressman William Green, the individual behind the 1926 raise, proposed it seemingly to prevent states--most notably Florida--from attracting residents who wished to avoid state death transfer taxes. (37) During a floor debate Congressman Green said, "Let me say to the people of Florida .... [You are] filling up your community with members of that ancient dishonorable order of tax dodgers, who, of all citizens, are the most narrow, the most selfish, and the most unpatriotic." (38) Congressman Green, by raising the cap, sought to eradicate completely the problem of interstate competition and the benefit states without a death transfer tax reaped by attracting new, wealthy residents. (39)

      The federal credit for state death transfer taxes "became the foundation for many state death tax systems." (40) In the few years following 1926, almost every state adopted a death transfer tax equal to or above the maximum federal credit. (41) Most states did not have an independent death transfer tax, but instead their tax was tied to the maximum federal credit, a tax known as a "pick-up tax." (42) After just a few years, the new federal credit "had effectively negated the interstate competition" for wealthy individuals that worried state governments just a few years earlier. (43)

    3. The EGTRRA of 2001 and the Demise of the Federal Credit

      The landscape of state death transfer taxes changed suddenly when Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). (44) Not only did EGTRRA increase the estate tax exclusion amount, (45) reduce the maximum marginal estate tax rate, (46) and gradually, but temporarily, repeal the federal estate tax, (47) it also included a four-year phase-out of the state death transfer tax credit, completely replacing it with a tax deduction by 2005. (48) The state death transfer tax deduction was far less generous than the previous tax credit, (49) and therefore gave new life to interstate competition and signaled the beginning of the downfall of state death transfer taxes. (50) States could no longer rely on the federal government to largely bear the burden of state death transfer taxes. Congress likely replaced the credit with the deduction to generate federal revenue to ease the financial burdens of other changes in EGTRRA:

      The federal government passed EGTRRA, but seemingly wasn't fully prepared to pay for it. Rather, by repealing the state death tax credit, the architects of EGTRRA placed much of the revenue burden on state governments. In fact, during most of the coming decade, the top net marginal federal estate tax rate may prove to be higher than it was prior to EGTRRA. Overall gross federal estate tax rates overtly decline, but it's the states that lose much of the revenue as a result. (51) The federal credit may have been repealed and replaced to counter EGTRRA's overall $ (1) trillion reduction in federal revenue in just the first ten years after its passage. (52)

      Because the majority of states prior to 2001 only relied on a pick-up tax and did not have an independent death transfer tax, (53) the repeal of the federal credit effectively repealed many states' death transfer taxes. (54) A few states that previously had a pick-up tax enacted a stand-alone death transfer tax. (55) And a few states affirmatively repealed their death transfer tax after EGTRRA. (56) After the repeal of the federal credit, states could no longer receive revenue from their death transfer taxes while allowing the federal government to bear the burden, reverting state death transfer taxes to their pre- (1924) state. (57)

      Before EGTRRA, every state had some sort of a death transfer tax; (58) today only seventeen states and the District of Columbia have such a tax. (59) The decrease of states with a death transfer tax is partly due to the...

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