$152 million refund likely after high court tosses state's estate tax

OLYMPIA — The Washington Supreme Court yesterday abolished an estate tax collected by the state, apparently wiping out an estimated $431 million that lawmakers had been counting on to help pay bills.

The decision, which is expected to refund millions in back taxes, was applauded by many lawmakers. "It's a big win for taxpayers," said state Rep. Dan Roach, R-Bonney Lake.

However, Democratic state budget writers, wrestling with a projected $1.8 billion budget shortfall, were staggered by the action. "It's a stunning blow," said Rep. Helen Sommers, D-Seattle, chairwoman of the House Appropriations Committee.

State officials project Washington owes about $152 million in back taxes and will lose an additional $279 million in revenue through the next two years.

The court ruling sparked more talk of tax increases among high-ranking Democrats in the Legislature and has some considering passing a new estate tax that would get around part of the ruling.

Lawmakers had hoped an improving economy would kick several hundred million dollars more than expected into the state treasury. The ruling wipes that out and then some. Democratic leaders said they'll have to make deep cuts in state services unless the Legislature comes up with more money.

At a glance


Ruling The state Supreme Court said Washington could no longer collect a share of the federal estate tax because the federal tax is being phased out.

Impact The state budget loses $431 million: $152 million in refunds, the rest in revenue it had expected to collect through the next two years.

Refunds There's no schedule for refunds yet, but heirs to a $1 million estate covered by the case could get back $33,200.

Sommers and Senate Majority Leader Lisa Brown, D-Spokane, also said the court ruling puts more pressure on Democrats, who control the House and Senate, to increase taxes.

Gov. Christine Gregoire yesterday again said she's drafting a budget that would not require new taxes but left the door open to them. "At the end of the day, I'm going to have to look at myself in the mirror and ask myself, 'Is this right for the state of Washington?' " she said.

Senate Republican Leader Bill Finkbeiner, R-Kirkland, said there's no need for additional taxes. The state needs to live within its means, he said.

The move by the Supreme Court wipes out the vestiges of a Washington estate tax, which is a tax on assets inherited when somebody dies.

Washington residents used to pay a state estate tax and a federal estate tax. Voters repealed the state tax by initiative in 1981. However, the federal government allowed the state to keep a portion of the federal estate tax paid by Washington residents.

The tax paid varied depending on the size of the estate. In the case of heirs to a $1 million estate, they would have paid the state $33,200 and would have sent $82,800 to the federal government.

In 2001, Congress passed, and President Bush signed, legislation phasing out the federal estate tax. But Washington officials kept collecting the state portion of the tax as if the federal law had not changed.

The state Supreme Court yesterday ruled the state can't do that.

"We concluded that when an estate has no federal-estate tax, there is no obligation to pay any state estate tax," the nine-member court wrote in a unanimous decision.

The court ruling does not prevent the state from passing an estate tax of its own to recoup some of the losses. Several lawmakers yesterday mentioned the prospect, but it's a controversial step that would quickly run into opposition.

"It would be very difficult to pass," Prentice said. "I don't think the votes would be there."

If the state takes no action, tax collections are expected to drop about $115 million annually in the future.

Any estate that paid state taxes beginning Jan. 1, 2002, likely would be eligible for at least a partial refund, according to the state Department of Revenue. The court sent the case back to the Thurston County Superior Court to figure out the details.

Tom Hemphill of Bainbridge Island was part of the lawsuit, arguing on behalf of his father's estate, one of several thousand estates involved in the appeal.

"I'm glad there's justice," he said yesterday. "The state never should have been charging us. Whether they're in the hole [now] is irrelevant."

Andrew Garber: 360-943-9882 or agarber@seattletimes.com.

Seattle Times reporters Ralph Thomas and Christina Siderius contributed to this story.