Death by Deduction : Section 2058 and the Decline of State Death Taxes

This article illustrates how, and seeks to explain why, the deduction for state estate taxes (Internal Revenue Code Section 2058) seems to have had no meaningful effect on state tax policy.Since the deduction for state estate taxes reduces the amount of federal estate taxes paid, the net effect is to shift to the federal government some of the cost of these state death taxes. Prevailing theories of tax policy suggest that state governments will structure their tax systems to maximize this type of available deduction. But theory has not borne out in practice. To the contrary, most states have responded to enactment of Section 2058 not by restructuring their existing state estate taxes to maximize this federal deduction but rather by entirely abandoning state estate taxes. While a remaining group continue to impose those taxes, they have failed to structure those taxes in a manner that would optimize the deduction. In short, the 2058 deduction seems to have had extremely little, or perhaps entirely no, effect on state estate tax policy.This article explores state responses to Section 2058, yielding important lessons about the operation of state legislatures, the political climate surrounding progressive taxation, and the interplay of federal and state taxes