Section of Taxation Publications
  VOL. 59
NO. 1
FALL 2005
Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

2004 Tannenwald Writing Competition
Defying Expectations: Assessing the Surprising Resilience of State Death Taxes

Robert Yablon

Yale Law School, J.D. expected, 2006; University of Wisconsin, B.S., 1999; Oxford University, M. Phil., 2002. The author thanks Michael Graetz, Ian Shapiro, and the members of the Politics of Tax Policy seminar at Yale Law School for their invaluable support at all stages of this project; Michael Mulroney, Tad Heuer, and the editors at the Georgetown University Law Center for their editorial assistance; and the Tannenwald Foundation for its generous support of student tax scholarship. This version of the paper includes several developments that have occurred since the paper was first written.

[ Editors’ Note: The Tannenwald Writing Competition is sponsored by the Theodore Tannenwald, Jr. Foundation for Excellence in Scholarship and by the American College of Tax Counsel. Mr. Yablon’s paper was awarded first prize in the 2004 competition.]



Despite the best efforts of opponents to drive a stake through its heart, the estate tax refuses to die. It is by now well known that the repeal measure enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA or the “Act”) did not eliminate the federal estate tax either immediately or permanently. Instead, between 2002 and 2009, the legislation gradually reduces the top marginal rate and increases the exemption level before finally eliminating the tax on individuals dying after December 31, 2009. However, only those who manage to expire between January 1 and December 31, 2010, will be entirely exempt from federal estate taxation. Without further legislation, when the clock strikes midnight on January 1, 2011, the estate tax will reappear in its 2001 form. Given this unusual sunset and sunrise provision, most commentators have remained preoccupied with events at the federal level, in particular with the ongoing effort to make estate tax repeal permanent. Meanwhile, they have devoted relatively little attention to one of the most important and surprising developments in estate tax policy since the passage of EGTRRA: the revival of estate taxes at the state level.

Although it may not be immediately obvious, this revival is directly linked to both the structure of the federal estate tax and the changes imposed by EGTRRA. For nearly 80 years, the federal estate tax provided a dollar-for-dollar credit for state “death tax” payments. In other words, estates could subtract any death taxes they paid at the state level from their federal estate tax liability up to a maximum amount established by a schedule in section 2011(b). Thus, the death tax credit essentially functioned as a revenue sharing arrangement between the federal government and the states: states could collect death taxes equal in size to the maximum credit without imposing incremental costs on their taxpayers. Unsurprisingly, as of 2001, every state structured its death tax regime to take in at least as much as the federal credit allowed. In most cases, this meant levying a so-called “pick-up” or “sponge” tax, which directly tracks the credit schedule of section 2011.

Removing the federal estate tax from the statute books inevitably sweeps away the state death tax credit as well. The drafters of EGTTRA, however, chose to accelerate the credit’s demise. Although the Act does not repeal the federal estate tax until 2010, it reduces the credit by 25% in 2002, 50% in 2003, and 75% in 2004, before eliminating it entirely in 2005.

The prevailing view among observers was that the many states levying only a pick-up tax would have no choice but to let their death tax collections dry up as the credit was phased out. In order to continue generating revenue, these states would have to redesign their policies, and their citizens would incur real costs. Given the success of the federal repeal movement in cultivating anti-estate tax sentiment, it seemed unlikely in 2001 that state officials would go down that road. Moreover, there were significant questions about whether stand-alone state death taxes would be efficacious given the ease with which people could relocate to more tax-friendly states. Conventional wisdom was that the states would have to find another way to recoup their revenue losses.

Yet, much to the chagrin of repeal advocates, state death taxes have not withered on the vine. Since the passage of EGTRRA, more than a dozen states have acted to decouple their death taxes from the federal regime, at least temporarily. About a dozen other states continue to levy state death taxes as a result of legislative inaction. This Article investigates why the states have defied expectations. It contends that EGTRRA, with its rapid phaseout of the state death tax credit, contributed to revenue losses at a time when state fiscal conditions were already deteriorating due to unfavorable economic conditions. Of course, even the most dire financial circumstances alone cannot dictate any particular course of action. Thus, this Article argues further that whether a particular state ultimately moved to protect its estate tax revenue also depended in large part on its ideological leanings and political configuration.

In order to put recent events into context, Part II examines the origins of the death tax credit, the effect of the credit on state tax policy, and the decision by Congress to accelerate its repeal. Part III turns to post-EGTRRA developments, outlining the anticipated state response and comparing it to what has actually occurred. Part IV undertakes quantitative analysis to test possible relationships between states’ policy choices and their budgetary, socio-economic, and political characteristics. Recognizing that statistical methods cannot reveal the true contours of state policy choices, Part V uses the states of Illinois and Washington to present a more detailed sketch of how events unfolded as states responded to EGTRRA.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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