Legislature approves a change in estate tax

OLYMPIA — Minutes before midnight, the Senate passed a change to the state’s estate tax that supporters called a technical fix worth $160 million and opponents called an unconstitutional “reach back”.

Gov. Jay Inslee signed the bill a half hour later, blocking the state from having to start mailing out as much as $40 million in refunds in the coming weeks. Those checks were set to go out at 8 a.m. today.

The House passed the estate tax fix before noon Thursday. It rewrites a portion of the estate tax law that the state Supreme Court said earlier this year was defective in the way it attempts to levy taxes on certain trusts set up for married couples with estates of more than $2 million.

But after the House vote, most of the remainder of the day was spent in negotiations and discussions about what other bills would have to be approved before the Senate majority would allow a vote on the estate tax legislation.

The final agreement was a basic trade: The Senate would vote on the estate tax fix after it and the House passed reforms to the state’s Model Toxics Control Act. With that accomplished in near record time — the House spent only a few minutes debating a bill that most members hadn’t read — the Senate voted at 11:57 p.m. to allow the tax to be levied on certain trusts worth $2 million or more that are set up by married couples.

Under these trusts, the estate tax isn’t levied until the second spouse dies and other heirs inherit the assets. The state Supreme Court ruled the law was not properly written to apply the tax after the second spouse died.

Under that ruling, known as the Bracken decision, about 70 estates would have been able to claim refunds of $40 million and the state was under a deadline to start paying up today.

“It truly does close a loophole that was determined by the Supreme Court,” Sen. Andy Hill, R-Redmond, said. It also keeps the state from having to pay some $160 million out of the state’s education trust fund — where estate tax money is deposited — over the next two years, said Hill, the chairman of the Senate Ways and Means Committee said. That money should be spent on education and end talk from Inslee and some Democrats of raising taxes to augment the state’s operating budget, which is still under negotiation.

Sen. Rodney Tom,D-Medina, said he voted against the estate tax in 2005 because he thinks it’s a bad tax for a state to levy. But he voted for the fix because “it was very clear when we passed that the intent wasn’t to tax couples and singles differently.”

The new law also provides some new deductions for family-owned businesses that have high property assets but relatively small cash reserves and increases the tax slightly on estates worth more than $4 million.

Some Republicans argued that the bill wasn’t a fix at all, but an invitation to another lawsuit, and another court loss.

“I don’t think we’ll ever see this money,” Sen. Mike Padden, R-Spokane Valley, said. “The Supreme Court will rule the retroactivity is unconstitutional.”

During the House debate, Rep. Reuven Carlyle, R-Seattle, agreed that the state will probably be sued, but lawyers have told him there’s a higher probability of winning than losing. The state has applied some tax laws retroactively in the past after court rulings and won, he said.

Rep. Gary Alexander, R-Olympia, said he was concerned about the retroactivity but supported the bill because the deal struck over a new deduction for family business assets could represent progress toward a future agreement on the overall operating budget: “We’re going to have to reach some amount of give-and-take to reach a budget.”

At a signing ceremony after midnight, Inslee said he hoped the agreement over the estate tax bill was “a harbinger of things to come.” The Legislature is in its second special session without agreeing on an operating budget for 2013-15, and the state’s fiscal year starts July 1. If a budget isn’t passed and signed by then, some state services may have to shut down because state officials won’t have legal authority to spend money.

Inslee said he didn’t think the day’s activity set a precedent for tying votes on other budget matters to votes on changes in policy that Senate Republicans favor.

“These bills were negotiated,” said Inslee, who made trips to legislative leaders’ offices during the day. “This is the way consensus is built.”

But he rejected Hill and other Senate Republicans’ suggestion that the estate tax fix, coupled with the increase in state revenues compared to the last two years, should negate the need for any more tax changes. The $160 million from the estate tax legislation is only “a very small step” toward an estimated $4 billion the state will eventually need to satisfy a separate Supreme Court order to improve public schools, he said.

“We have a lot more work to do. There are loopholes that need closing,” Inslee said.

Before the Senate would vote on the estate tax, the Majority Coalition Caucus insisted that both it and the House pass reforms to the state’s Model Toxics Control Act. Late in the evening, it passed the toxics bill and sent it to the House, which debated and passed the 50-page bill in a matter of minutes.

That action had some of the House’s more conservative members, like Rep. Shelly Short, R-Addy, in rare agreement with some of its more liberal members, like Rep. Hans Dunshee, D-Snohomish. Short said the reforms would encourage faster cleanups of toxic sites.

Some members complained that it was a complicated bill that they hadn’t had time to read. After a short debate, however, the toxics cleanup bill passed 67-18 and also was sent to Inslee for his signature.