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Department of Revenue Warns Estate-Tax Problem Will Cost State $160 Million, Unless Legislature Takes Action

Official Estimate of Impact of Supreme Court’s Bracken Decision is Revealed at Hearing – Not as Big as Feared, But Still a Big Gulp for Lawmakers

Gov. Jay Inslee pledges his support for state's newest industry.

A big, big problem, says Gov. Jay Inslee.

OLYMPIA, Jan. 25.—An estate-tax ruling from the state Supreme Court will cost the state $160 million if the Legislature takes no action, lawmakers were warned by the state Department of Revenue Friday. That’s a bit less than the $300-millionish figure that had circulated widely at the statehouse in recent days, but still enough for alarm in a year when the Legislature doesn’t have an extra nickel.

And it sets up a debate sure to rage in coming weeks as lawmakers try to decide how they might respond – fix the state estate tax? Or just junk it entirely?

The Department of Revenue presented its official estimate Friday during a hearing of the House Finance Committee. The Supreme Court’s decision last October essentially wiped out the state’s ability to collect estate taxes when the surviving partner in a marriage dies, if a commonly used estate-planning tool is utilized. “Marital estates, if properly implemented, would avoid the estate tax completely,” said Drew Shirk of the Department of Revenue.

The decision became final after the Supreme Court rejected a motion for reconsideration Jan. 10, just before the start of this year’s session. It leaves lawmakers to decide whether they want to pass a bill to reimpose the state’s estate tax, which is levied on estates of more than $2 million. The hitch is that a vote to raise taxes would require a two-thirds vote of the House and the Senate, at a time when 10 Republicans have signed onto a bill in the House that would ditch the tax entirely. Which puts the administration of Gov. Jay Inslee in a political pickle in its opening days.

In comments to reporters Thursday, Inslee said it’s not the only difficult decision that has been forced on the Legislature by the Supreme Court – the other, of course, is last year’s ruling in the McCleary case that requires lawmakers to come up with an extra $1 billion or more for K-12 education in the current session. “I think we are all going to have a very thorough evaluation of the ramifications of this decision,”he said. “We know that the McCleary decision requires billions of dollars of investments in public education, and we know that this decision has the capability, perhaps, of diminishing revenues in the tens if not hundreds of millions of dollars.

“So we all are going to have to take a step back and evaluate what the real ramifications of this real decision are. We have not done that yet. We will be talking about that for the months to come.”

A Common Tool

Final figures were revealed Friday to the House FInance Committee.

Final figures were revealed Friday to the House Finance Committee.

The decision affects a tax-planning mechanism known as a qualified terminable interest property trust, or QTIP. If a spouse places property in such a trust prior to his or her expiration date, federal taxes are deferred until after the survivor dies. The state also has collected its money at that point. But in its ruling last October, the court said the state didn’t properly account for such trusts when it created a new estate tax in 2005. The ruling affected two estates – that of the late Sharon Bracken and the late Barbara Nelson. But Shirk told the House Finance Committee Friday that the Department of Revenue has been advised by the attorney general’s office it could be applied broadly. Already the state has been getting refund requests from estates that had paid taxes after 2005.

The ruling does not affect taxes paid by the estates of single or divorced persons.

Lawmakers could act to restore the tax and apply it retroactively – meaning that the only two who would benefit from the ruling would be the Bracken and Nelson estates. The state did just that in another big-money case three years ago. An adverse ruling in the so-called Dot Foods case threatened tax collections from every out-of-state company involved in direct sales in the state of Washington, a potential $122 million hit at the time. A retroactive fix was included in that year’s sweeping tax legislation.

But because voters approved Initiative 1185 last fall, requiring a two-thirds vote for any measure that increases taxes, such a measure would require the cooperation of Republicans who are skeptical of any tax measure. Earlier this week, state Rep. Cary Condotta, R-East Wenatchee, one of the sponsors of the estate-tax rollback bill, told Washington State Wire Republicans aren’t about to say yes to death taxes. He said lawmakers also can make things equitable by eliminating the tax.

Changed Assumptions

So how come the numbers changed? When the Supreme Court’s latest ruling came down, buzz in Capitol hallways was that the impact might run as high as $290 million during the 2013-2015 biennium. Department of Revenue spokesman Mike Gowrylow notes the big number wasn’t an official estimate – just the top end of a potential range as the department’s policy staff and attorneys reviewed the court’s rather complicated decision. They concluded that it applied only to QTIP trusts, not to taxes paid by a broader range of taxpayers.