House committee OKs change to state estate tax after ruling

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OLYMPIA — A House committee on Wednesday passed a measure making changes to the state’s estate tax for married couples in response to a state Supreme Court ruling that could cost the state $160 million over the next two years.

The 8-3 vote by the House Finance Committee is a legislative workaround to last year’s ruling by the high court, which found that the estate tax did not apply to married couples who had used a certain estate planning tool prior to 2005.

The measure passed by the House panel requires the estate tax be paid on the value of the estate above $2 million, regardless of marital status.

The state had interpreted the high court ruling to apply to estates that used the tool after 2005 as well, officials with Department of Revenue have said. The planning tool in question allows a spouse to transfer assets to a surviving spouse without paying taxes if they’re using a certain type of trust.

The state agency says it has already received 70 refund requests totaling between $4O million and $50 million from estates that had paid the taxes prior to the court ruling. Others have gone to court to seek refunds. The state agency plans to start processing refund requests next week, and expects to pay all refunds by the end of June, according to spokesman Mike Gowrylow.

Bill sponsor Timm Ormsby, D-Spokane, told the committee that the legislation closes an unintended loophole created by the ruling.

“We’re not talking about an infusion of revenue,” he said. “We’re talking about stopping the hemorrhaging of revenue we’ve already counted on.”

The measure could come up for a vote on the House floor as early as Thursday.

Even if the Legislature approves the measure, which is retroactive, Gowrylow said that the department would not be able to recover any refunds that were already made before the law was signed. But the measure would affect all future refund attempts.

He said that the impact of the court ruling is expected to be $160 million for the next two years, and about $40 million a year after that.

In the joint case that sparked the measure, the Estate of Bracken and Estate of Nelson, the state has already paid a refund of $3.2 million to the Bracken estate, and cancelled a $2 million assessment on the Nelson estate, Gowrylow said.

Rep. J.T. Wilcox, R-Yelm, voted against the bill in committee, saying that who does and doesn’t receive refunds is “fundamentally unfair.”

“However, the possibility exists that we can use this bill, in a way in the future that will make this a little more acceptable, a little more fair, and improve the current law,” he said.

The state Supreme Court overturned the state’s estate tax in 2005, leading the Legislature that year to pass a law restoring a narrower version of the tax, having it apply to estates of $2 million or more. Last year’s ruling addressed the application of estate tax to a particular estate planning vehicle.

Lawmakers are in the midst of a 30-day special session that began on May 13. They face a $1.2 billion budget shortfall for the two-year cycle that ends in the middle of 2015. That doesn’t count for other money lawmakers are seeking for education in response to a court-ordered requirement that the state isn’t fulfilling its obligations there.

Budget negotiations have been taking place for weeks between the Democratic-controlled House and the Senate, which is controlled by a coalition of 23 Republicans and two Democrats.

Senate Republican Leader Mark Schoesler declined to discuss in detail how Republicans view the estate tax proposal, though he said it is a potential piece of a final budget solution. On Wednesday afternoon, a key Republican budget writer, Sen. Andy Hill of Redmond, introduced a Senate version of the bill, which lowers the rate on the tax in the future but also addresses the ruling as the House bill does. That measure also phases in raising the value of estates to be taxed from $2 million to the federal level of $5 million. That bill is scheduled for a public hearing on Friday. Another bill, by Sen. John Braun, R-Centralia, would only lower the rate and increase the value of estates to be taxed. That bill is also set to have a public hearing on Friday.

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