Court kills death tax, orders refunds

OLYMPIA, Wash. – The state Supreme Court threw out Washington’s estate tax Thursday, causing a potential loss of $430 million over the next two years at a time when lawmakers already are facing a $1.8 billion spending gap.

The unanimous decision by the nine-member court concluded that “when an estate has no federal estate tax, there is no obligation to pay any state estate tax.” It ordered a refund of estate taxes collected by the Department of Revenue since Jan. 1, 2002.

The refund could be as high as $150 million, said Mike Gowrylow, a spokesman for the state agency. He said the $430 million includes that refund, and the state’s reliance on $277 million that was expected to be collected from 2005 to 2007.

“There is no question in my mind that we have made a difficult budget much, much more difficult,” Gov. Christine Gregoire said at a Thursday news conference about her economic development plans.

Gregoire repeated her desire to produce a state budget that closes the $1.8 billion gap without new taxes.

“I want to see a no-new-revenue budget,” she said. “I owe it to the citizens of the state of Washington.”

Gowrylow said the House Finance Committee was to meet today to discuss ways to address the new shortfall.

“We’ll continue to work with the governor and Legislature to assess the impact of this,” he said.

The court’s decision upholds a 1981 voter initiative that tied the state death tax to the federal death tax. Washington’s estate tax used to be defined as the amount of a credit calculated at the federal level. Federal legislation passed in 2001 provided for phasing out the state death tax credit over three years, beginning in 2002. But Washington did not conform with that change, and the state continued to collect its tax based on the old tax code.

All federal estate tax will be repealed as of 2010.

A group of heirs sued in 2002, and in 2003, a Thurston County judge upheld the state estate tax, saying it was based on the federal tax code as it existed on Jan. 1, 2001. The estates appealed.

Several states that were in similar predicaments updated their estate tax provisions. Washington’s failure to do so, and the state Revenue Department’s continued imposition of the tax exceeded its authority, said attorney Raymond Siderius, lead counsel for the class of approximately 3,000 estates involved in the appeal.

“It took a lot of courage on the part of those nine judges to throw those taxes out, considering the fiscal problems with the state right now,” said attorney Orly Sorrel, who represented some of the appellants. “We’re delighted with the result.”

House Finance Chairman Rep. Jim McIntire, D-Seattle, said his committee has invited Revenue Department officials to a hearing Friday to “talk about the magnitude of the impact of this … what has to be done to stop hemorrhaging.”

“It’s a big number,” he said. “If it’s $430 million on top of a $1.8 billion shortfall, it just compounds the serious problems we have.”

McIntire said one possible solution would be to adopt a stand-alone estate tax that is not intertwined with the federal tax code, but he said that it was too early to tell whether that’s the route the Legislature would want to go.

Rep. Dan Roach, R-Bonney Lake, who sponsored a bill this year that would have eliminated the state estate tax, called the ruling “a big win for taxpayers.”

“No question it will make it harder to balance the budget, but they shouldn’t have collected it in the first place,” he said.

The case is Estate of Wylie M. Hemphill et al v. State Revenue et al, No. 72485-7.