Washington House OKs change to state estate tax

OLYMPIA, Wash. (AP) -- The Washington state House on Thursday narrowly approved a measure making changes to the state's estate tax for married couples in an effort to avoid refunding millions of dollars to estates following a state Supreme Court ruling.

The measure passed on a 51-40 vote and now heads to the Senate for consideration. The bill 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. Officials say that if a fix isn't made to the law, it could cost the state $160 million over the next two years.

The Department of Revenue says it has already received 70 refund requests totaling between $40 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 unless the Legislature takes action, according to spokesman Mike Gowrylow.

"The clock is ticking," said bill sponsor Timm Ormsby, D-Spokane. "We're in a time critical stage right now."

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.

Republicans raised concerns about inequity for estates that would not receive refunds because of the timing of the legislation, as well as constitutional concerns about the retroactivity of the measure that could lead to the state being sued.

"The state will end up having to pay back the estate taxes that are owed to these families, plus interest, plus attorney fees," said Rep. Terry Nealey, R-Dayton. "We're just delaying the problem."

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 used before 2005, but Gowrylow said the state had interpreted the high court ruling to apply to estates that used the tool after 2005 as well. 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.

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 Republicans have introduced estate tax measures this week as well. On Wednesday afternoon, a key Republican budget writer, Sen. Andy Hill of Redmond, introduced a 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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The estate tax bills are House Bill 2064 and Senate Bill 5939, 5940.