State Supreme Court throws out estate tax

OLYMPIA — The state Supreme Court threw out a Washington's estate tax today, causing a potential loss of $430 million over the next two years at a time when lawmakers are already 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 from 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 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 on tomorrow 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. The state's tax was a "pickup" tax - meaning the state got its money through a credit that the estate saved on the federal taxes. Congress began phasing out the federal estate tax in 2001. But Washington continued to collect its tax based on the older tax code because the Legislature had not updated the code to reflect the new federal law.

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 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."