Wealth-Transfer Taxes in U.S. Fiscal Federalism: A Levy Still in Need of Reform

Abstract

Wealth-transfer taxes are federal and state levies on the value of estates, inheritances, and gifts. Because the federal government allows a limited tax credit, repeal of the federal tax has implications for state governments. This article discusses the economic justification of taxing wealth transfers and provides data on the importance of the tax from 1977 to 1997. We measure the degree of variation in the use of the tax among the states and pinpoint those states for which death taxation is most important. Wealth-transfer taxation needs reform but, repeal of the federal tax is inappropriate. Instead, the state levies should be abandoned. We conclude by proposing to repeal the state taxes and reduce the federal tax by an amount equivalent to the value of the federal tax-credit. The resulting revenues, however, would not to be garnered by the federal government but returned as revenue-sharing funds to the resident state of the decedent.