Interstate Competition and State Death Taxes: A Modern Crisis in Historical Perspective
State death taxes are one of the oldest forms of state revenue, dating back to the early 19th century. Yet, as the 21st century begins, these taxes face a significant crisis. In just the past five years, prompted by the 2001 repeal of the federal "state death tax credit" that had facilitated collection of these taxes, and yielding to increasingly vocal anti-tax rhetoric, half of the states simply have abandoned this form of tax revenue. This dramatic shift in state tax policy impacts not only the states that have repealed death taxes, but also those that still impose these taxes. The former now must find alternate forms of revenue or reduce governmental expenditures. The latter now must fear that taxpayers will "vote with their feet," abandoning the states that impose death taxes towards the growing number of states touting their more favorable tax climates. As interstate competition to attract these wealthy migrants intensifies, at stake is far more than the mere billions of dollars of state revenue generated by death taxes. Rather, the crisis implicates the fundamental nature of modern state taxation, raising the question of whether traditionally progressive forms of state taxation can survive in an increasingly mobile society.
This Article contends that the current decline of state death taxes is not an isolated modern event, but rather one step in a decades-long interstate battle to attract and retain wealthy citizens. As such, before we can comprehend the potential consequences of the decline of state death taxes, and perhaps progressive taxes more generally, we must rightly address the fundamental underlying question: how did we get where we are today? The Article attempts to address that question and fill a gap in the modern literature by providing a comprehensive treatment of the history of how interstate competition shaped state death taxes and how the state death tax credit, now repealed, altered that history. By placing this modern tax crisis in its historical perspective, the Article reveals both a major current challenge facing state death taxes, as well as an underlying, brewing, battle between states that depend on progressive forms of taxation and states that provide a safe haven for taxpayers seeking to avoid such taxes.