As we've written before, the phasing-out of the federal estate tax has left a complex minefield of state-level estate taxes in its wake. But those state-level estate taxes may be headed for the grave in the near future as well, thanks to the power of state tax competition for wealthy residents. At least that's the conclusion of one new study from Prof. Jeffrey Cooper of the Quinnipiac University School of Law. From the introduction:
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 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 modern state leaders resume where long forgotten predecessors left off, completing the migration away from death taxation and towards other forms of tax revenue.
Read the full paper here. For more on the economics of estate taxation, see our "Estate and Gift Taxes" section.
