OLYMPIA -- Over objections that the Legislature was unconstitutionally reaching into the past to collect taxes, the House passed a change to the estate tax law that attempts to erase a loss in court.
House Bill 2064 passed on a 51-40 vote after Democrats described it as a technical fix to close a loophole the Supreme Court opened in tax law, and necessary to pay for schools. The estate tax is deposited in the school trust fund.
Rep. Timm Ormsby, D-Spokane, said the Legislature has reached a consensus that it must do a better job of paying for education, and closing the loophole in the estate tax law is one component of that.
"The clock is ticking and we have some responsibilities to fill." he said. The tax affects the state's wealthiest families -- it applies only to estates with assets over $2 million -- so the choice is between giving them a refund from estate taxes they've paid or keeping the money in the school trust fund, he added.
Republicans argued that rewriting the law to fix the problem the Supreme Court found, and applying it retroactively, was unconstitutional. The state was collecting taxes it shouldn't have, and now needs to give them back, Rep. Terry Nealey of Walla Walla said. If the state loses another court battle, it will have to pay the back taxes, plus interest and attorneys fees.
The issue involves a type of trust that some married couples use known as a qualified terminal interest property or QTIP, which keeps the assets from being taxed when the first spouse dies, deferring the estate tax until the second spouse dies. The Legislature passed the current estate tax law in 2005, and voters approved it through a referendum. But last year the state Supreme Court said the Department of Revenue was incorrectly collecting taxes from trusts in which the first spouse died before the law passed and the second spouse died after it took effect.
The state Department of Revenue will begin preparing refund checks next Monday for 70 estates that are effected by the court ruling, and expects to mail those checks, totalling more than $40 million, the following week, Mike Gowrylow, a department spokesman, said. Without the legislative changes, the state's Education Trust Fund would lose about $140 million over the 2013-15 biennium, between the refunds and taxes that it wouldn't be able to collect, the Office of Financial Management estimates.
Ormsby said it's a simple choice between writing refund checks to some of the state's wealthiest families or supporting schools. Rep. Reuven Carlyle, D-Seattle, said the bill was just a "technical fix" of the law and the Legislature always intended the estate tax to be applied in this manner.
But Rep. Matt Manweller, R-Ellensburg, said making the law retroactive runs afoul of the U.S. Constitution, and suggests "all sins are forgiven if it's done in the name of education."
Rep. Ed Orcutt, R-Kalama, said the bill won't just hit the wealthy, but estates that are high in property assets but with little liquid capital: "What are we going to do retroactively next?" he asked.