Estate tax typifies patchwork action

The Washington Legislature’s 2005 session ends this weekend. Once again comprehensive tax reform never got the studious attention it desperately needs. Instead, lawmakers cobbled together a piecemeal package of revenue measures to patch serious holes in the state’s finances.

Last-minute approval of an estate tax – which the Senate approved along party lines Thursday and sent to the House – is a prime example.

When the session opened in January, the state had an estate tax that generated about $100 million a year. In February, though, the state Supreme Court ruled it invalid because it was pegged to a federal tax through a mechanism that had been eliminated as part of a phase-out that will be complete in 2010. If Washington state wanted to collect a share of someone’s estate, the Legislature was going to have to adopt its own free-standing estate tax.

That, in a way, is what lawmakers have done, although it’s a far cry from reverting to the status quo.

In 1981, Washington voters jettisoned one inheritance tax. They replaced it with a so-called “pick-up” tax which was set at whatever amount the federal government would allow as an offset against the federal tax bill. For the estate and the heirs involved, it was a wash; they paid the amount of the federal rate, but some of it went to the state instead.

No more. Since Congress is phasing out its tax, it also has scaled back the state credit until, as of this year, it’s gone. Now the state tax is a true add-on, no matter what federal liability exists.

The Legislature isn’t taking much of a political risk. The tax just approved applies only to estates worth $1.5 million or more for people who die this year, and $2 million or more beginning in 2006. Over the next five years, the state Department of Revenue estimates, the assessment will apply to an average of only 240 estates a year.

And just in case that handful of the most wealthy Washingtonians make a plea for sympathy, the proceeds are dedicated to reducing class sizes in the public schools. Who’s going to argue with taxing the rich to pay for education?

In concept, maybe no one. But important considerations get left out when tax policy is crafted on the fly.

Like Initiative 884, a sales tax proposal rejected at the polls last fall, the new measure creates an added revenue source for a program that has a constitutional claim on the first dollars out of the state treasury, not the last. Basic education is the state’s paramount duty; once that cost has been covered, if the state has more to do, those are the programs that should have to depend on new taxes.

Meanwhile, although the estate tax’s impact will be narrow, an area like Spokane – struggling economy, abutting a neighbor state – can’t afford to ignore any policy that gives business owners an incentive to locate elsewhere.

To the individual who pays it, no tax is welcome. Creating an overall structure that is fair, effective and reliable, however, requires a thoughtful approach with all elements on the table at once. That won’t happen as long as the Legislature sticks to its hit and miss style.