| The Old Washington State Estate Tax |
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February 4, 2005
Yesterday, February 3, 2005, the Washington State Supreme Court ruled against the State of Washington in a case involving the Washington State Estate Tax. As a result of the Court’s decision, many Estates that had previously paid the Washington State Estate Tax are entitled to a refund, and Estates that must file in the future will pay a reduced amount of tax.
The above paragraph is based on newspaper accounts of the Court’s decision—it may change once the Court’s decision is available for analysis.
At this time, it is not clear how the Washington Department of Revenue will implement the Court’s decision. It may require a filing by the Estate, or the Department may review all filings and simply mail any refund checks. In either case, I anticipate it will take a couple of weeks for the Department of Revenue to implement a policy, and a couple of months before refund checks are mailed.
Some background in the case may be helpful, not only to understand the refund, but also to understand some of the “finger pointing” that will take place in the press and political circles.
The federal estate tax allows for a limited credit for state estate and inheritance taxes paid, based on the size of the estate. Most of the states modified their estate tax systems to make the state tax equal to the amount of the credit allowed in the federal estate tax return. For those states without an estate tax, it was additional tax revenue without any additional tax cost to the estate. For those states with an inheritance tax system, using the amount of the credit for state taxes greatly reduced the costs of administering the state tax system without a significant change in tax revenue. This tax is known in professional circles as the “pickup tax.”
The State of Washington changed its tax system by means of an initiative that had as it stated goal that the state estate tax would not be more than amount of the credit allowed on the federal estate tax return—that the tax imposed by the State of Washington would not increase the estate’s total tax burden. State law incorporated the federal Internal Revenue Coded by reference to the federal law, rather than duplicating in state law the language of federal law.
In 2001 Congress amended the Internal Revenue Code, increasing the size of estates that are exempt of the federal estate tax and decreasing the amount of state taxes that are allowed as a credit against the federal estate tax. The result of the federal legislation was to reduce the tax revenue to the states than had adopted the pickup tax as their estate tax. This is the corollary to the unfunded mandate that we frequently read about.
A number of years ago the Washington State Supreme Court ruled that the state legislature cannot delegate its responsibility to Congress—if Congress changes a law that is incorporated by reference in state law, the legislature must proactively change state law if that is its’ desire. The Washington State Legislature did not change state law to conform to the amended federal law. In substance, the State of Washington was using an old version of the Internal Revenue Code.
The state Department of Revenue was caught up between two conflicting laws—the clear intention of the initiative that created the state estate tax, and the decision of the state Supreme Court that prevented the State’s adoption of changes in federal law without the legislature’s acquiescence. The issue had to be resolved by the court.
The reason for the controversy is not the Supreme Court, and some of the comments in the papers imply, and it is not the Department of Revenue, which administers the law. The problem lies with the members of the State Legislature who failed to act, either to overturn the initiative, or to adopt the Internal Revenue Code as it was amended. It is the inaction of a state legislature in coming to grips with how to fund the needs of government that created the problem. Ultimately the problem is ours, as we elect the members of the legislature, and we have to deal with paying for the legislature’s inaction.