POLICY HIGHLIGHTER

Volume 14, Number 25
November 5, 2004

Department of Revenue raises "death tax" from the grave

By passing Initiative 402 in 1981, voters thought they had abolished this state's inheritance taxes. In reality the inheritance tax was abolished in favor of an "estate tax." This estate tax is also called a "pick-up tax," because the amount payable in the state estate tax was equal to the amount that one could credit against federal estate tax obligations. For example, if an estate received a $25,000 tax credit toward any federal excise taxes, it would owe $25,000 in Washington estate taxes. In other words, there was no net cost to an estate, and the state simply "picks up" the amount saved in federal taxes.

In 2001, the federal government took a key step toward abolishing the federal estate tax by increasing the size of taxable estates to $1 million in 2002 and ultimately eliminating the estate taxes by 2010. The federal government partially financed the federal breaks by cutting the credit for state estate taxes paid. The credits dropped to 75 percent of state taxes in 2002; 50 percent in 2003; 25 percent in 2004 and will drop to 0 percent in 2005. Because of this federal tax code change, states faced a tough choice: forgo estate tax revenue or impose an estate tax that would cost real money and might drive wealthy estate holders away. Twenty-five states including California, Texas, and Florida followed the fed's lead and are only collecting the "pick-up tax" revenue.

Unfortunately for Washingtonians, as the federal estate tax was lowered, our state Department of Revenue (DOR) increased the amount due from deceased property owners.

Equally troubling, DOR announced (without legislative approval) that the threshold for filing and paying Washington state estate taxes would be reduced from $1,000,000 in assets to $700,000. This conflicts with existing state law (RCW 83.100.050) which states, "No Washington return need be filed if no federal return is required." The federal government's threshold for filing was increased to $1,000,000. This means that in 2003, a Washington resident who died owning a taxable estate of $1 million owed zero federal estate tax, but owed $33,200 in Washington state estate taxes.

Estate tax filing threshold

Source: DOR

It is worth noting that a $700,000 - $1,000,000 estate is not unusual for middle-income families when considering the value of a home, life insurance, and retirement funds.

A class action lawsuit was filed last year in Thurston County protesting DOR's actions and requesting refunds of taxes already paid. Last December, however, the trial court ruled in favor of DOR and recommended the case should receive direct review by the Supreme Court, rather than the Court of Appeals. The State Supreme Court heard arguments on September 30 and, at one point during the hearing, Justice Bridge asked the attorney representing the state if the Department of Revenue was merely trying to impose a tax "through the back door" without a statute expressly authorizing DOR's actions.

DOR's arbitrary estate tax change without legislative approval is particularly bad for farmers and small business owners who want to pass their livelihoods on to their families. If the high court rules with DOR, lawmakers will have to address this issue in the upcoming session. If the Supreme Court does not act by the start of the 2005 Legislative Session, lawmakers should pass legislation to re-tie Washington's estate law to the current Internal Revenue Service Code. Washington's voters have already said no to a death tax, and the legislature should ensure the state's bureaucracy does not unduly punish citizens working to successfully provide for their family's economic well-being.

As one concerned businessman recently stated about DOR's estate tax policy: "This is a terrible example of stealth government by politicians and by the state revenue bureaucracy. It's counter to the peoples' will and it kills jobs and businesses." The legislature should not allow DOR's estate tax policy to continue.

Resources
The Washington State Excise Tax Return and instructions are available on the Department of Revenue's website at http://dor.wa.gov/content/Forms/forms_EstateTax.aspx

Information on the class action lawsuit is at: www.estatetaxeswashington.com

Prepared by: Bob Williams | President | 360.956.3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org