House Finance Committee Chairman Reuven Carlyle, D-Seattle.
NOTE: This story, updated at 6 a.m. Friday, is an early take on the drama that played out at the statehouse late Thursday and early Friday morning. For a fuller account, see: Last Minute Deal-Making on Estate Tax Raises Prospects for Session Compromise — Late-Night Leverage Brings Bargain on Environmental Bill.
OLYMPIA, June 14.—Just before the Department of Revenue began mailing multi-million-dollar refund checks to the estates of some of the wealthiest dead people in Washington, lawmakers came to an agreement that will keep that money in state coffers. The deal on the estate tax came after a late-night, down-to the wire finish that had the Senate executing a complicated deal for one of its major pieces of reform legislation in return — a bill that will require the state to steer more tax money toward hazardous-waste cleanups.
The state House of Representatives Thursday morning passed a bill that retroactively fixes a glitch in a 2005 law, squaring state law with a court decision that invalidates the Washington estate tax for married couples that use a common estate planning technique. A little over 12 hours later, the Senate passed the same bill. But it came after a day of negotiations between House and Senate that ultimately demonstrated the two chambers could manage to set aside their differences and work together after all — and that sometimes the Legislature works best under pressure. At midnight the Republican-leaning Senate Majority Coalition Caucus permitted a vote on the estate-tax measure, and it passed 30-19. But before the Senate would accept the estate-tax measure, leaders of the majority coalition insisted on the passage of the environmental-cleanup bill, forcing a last-minute compromise on that bill as well.
Gov. Jay Inslee signed both measures into law in a brief ceremony in the wee hours Friday morning. The result? The state won’t be mailing out refund checks today.
A Negotiated Agreement
During remarks on the House floor Thursday morning, Finance Chairman Reuven Carlyle, D-Seattle, said House Bill 2075 represents a negotiated agreement with the Republican-leaning state Senate. “We came to consensus,” Carlyle said.
The dispute over the estate tax had been one of the big flareups as the Washington Legislature attempts to reach a deal to end the 2013 Legislative session before the current fiscal year ends on June 30. But unlike all the other disputes that are inherent in the current debate over taxes, spending and state-government reforms, this one had to be resolved immediately or else the state stood to lose big money. The state Department of Revenue, under pressure of court orders obtained by nine estates, was set to mail out checks totaling $12.2 million, said spokesman Mike Gowrylow. The department faced a 9 a.m. Friday deadline, when it was due to make an appearance in a hearing before a judge in Thurston County. Ultimately the legislature beat that by roughly eight and a half hours. Inslee signed the bill into law at 12:30 a.m.
Some 70 refund requests totaling nearly $50 million had been submitted to the Department of Revenue, and the state’s total liability for refunds might have run as high as $138 million.
The measure was approved by a vote of 53-33 in the House, a vote-count that reflected the fact that many Republicans have serious misgivings about the fix. In the Senate, many Republicans peeled off the bill, but because they permitted the vote there were more than enough Democratic votes to pass the measure.
Part of Larger Deal
The time-traveling fix is part of a larger deal on the estate tax. As described by Carlyle on the House floor and by Senate Ways and Means chairman Andy Hill, R-Redmond, in a meeting with reporters over the weekend, the deal would provide a deduction for small family-owned businesses, but would increase tax rates for the very wealthiest estates. “The Senate felt very strongly that it was important for this to be part of a broader package, and we were willing to engage with them in a meaningful way, so long as we could do so in a revenue-neutral way,” Carlyle said.
The Washington estate tax, imposed on estates greater than $2 million, has long been a bone of contention for Republicans, whose distaste for the tax is reflected by the fact that they refer to it as the “death tax.” Washington adopted the tax in 2005 when changes in the federal tax code meant the state could no longer “piggy-back” on the similar federal estate tax. Opponents attempted to overturn the tax in 2006 with an initiative, but Washington voters approved it with 62 percent of the vote.
The problem was a technical glitch in the way the statute was written, making reference to obsolete segments of federal law. The state Supreme Court last year, in what became known as the Bracken decision, threw out that part of the tax that applied to married couples who used a common technique to defer taxes until the second partner died. The state is making a $5 million refund to the two estates that participated in that case – but the big question was, what about the 300 or so other estates that have been liable for the tax every year? The Department of Revenue estimates total liability for refunds at $138 million, and without a fix said the state stood to lose $22 million during the 2013-15 biennium. In a year when lawmakers are scrambling to raise $1 billion or so for new K-12 education spending and are debating other big tax increases, political distaste for the tax butted up against hard budget realities.
Retroactive Fix Makes Rs Gulp
Republican members of the state House said they had qualms about passing a law that essentially reaches back in time, corrects references in statutes, and declares earlier taxation to be valid. Indeed, the fix was opposed for that reason by the estate-tax committee of the state Bar Association that reviewed the matter. Said state Rep. Terry Nealey, R-Dayton, “It reaches far back and affects taxes that would be owed years from years ago, and the problem is that those refunds are due to be paid out very soon, and according to the Supreme Court decision, those are rightfully due to those estates. I think that we are bordering on unconstitutionality if this bill passes. And if further lawsuits were to come against the Department of Revenue, i.e. the state of Washington, then we would not only have to pay those refunds back, but with interest and with attorney’s fees.”
The Department of Revenue maintains the retroactive fix is legally proper, however. There have been similar retroactive fixes in the past that have been challenged and upheld by the courts, Gowrylow said.
Key element of the argument is that the intent of the law from the beginning was that married couples would be liable for the tax. State Rep. Jamie Pedersen, D-Seattle, said the “technical glitch” in the law and the adverse court decision create an unexpected windfall for those families that have applied for refunds. He noted that by creating what are called Qualified Terminable Interest Partnerships, the families intended to pay the estate tax on the death of the second spouse, not escape it entirely. “We are playing the expectations of those 70 families that planned to pay the estate tax against the expectations of the more than 1 million children whose education depends on us doing a better job of funding it,” he said.
All rhetoric aside, House Republican budget chief Gary Alexander of Olympia said the big issue was whether the state would have to mail out big checks on Friday morning. “If this gets us to a resolved consensus without requiring new tax obligations on our citizens that would affect their daily lives, then I think this is a move that ought to be supported,” he said.
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