State “Death” Taxes and Elderly Migration – The Chicken or the Egg?

Researchers and state policymakers have hypothesized that the elderly may move to another state to avoid paying “death” (i.e., inheritance, estate, gift) taxes. This belief may be responsible for the recent revolution in state “death” tax policy whereby 30 states have eliminated their death taxes in favor of the ‘pick-up’ tax since 1976. Is this hypothesis empirically valid? Past research, while weakly supportive, has important limitations casting doubt on their findings. Foremost, all past studies use cross-sectional data. The validity of this approach is questioned, however, when one observes that states which were historically big net-importers of the elderly were also the first to eliminate their death taxes. This begs the question of causality: does heavy net inmigration lead to reduced “death” taxes or do low death taxes capture some unobserved, longstanding desirability of the state for the elderly? Our analysis addresses this issue by using migration data from four different censuses (1970, 1980, 1990, 2000) combined with information about changes in state ‘death’ tax policy to track how changes in elderly movements are related to changes in death tax policy. A second improvement lies in our measure of state death tax policy. Unlike tax shares and effort indices, which will be nonzero for ‘pick-up’ states when the true net burden to the estate is zero, our measure is the first to properly account for the ‘pick-up’ tax when appropriate. Our final advance borrows from the difference-in-difference approach, using nonelderly age groups as our ‘control’. This advance is important because the elderly tend to move to the same states as the working population; what one really wants to capture are differential effects on elderly migration. The end result of our research will provide a more accurate picture of how elderly migration responds to state fiscal policy, especially state ‘death’ taxes.