Why does a code 2 on line 7 of my husband's 1099R cause us to owe $1000 in state tax. We don't have to pay state tax on our pensions so why would we owe $1000?

It is common even for states that do not tax pensions, to assess tax on early pension distributions. Code 2 indicates "Early distribution, exception applies".

Since we do not know which state you are referring, we cannot be positive of why your state is charging you tax.