UPDATE 1:15 P.M. | Adds information on House vote
House and Senate negotiators have reached tentative agreement on how the state could get around a 2012 state Supreme Court ruling that allows certain married couples to escape Washington’s estate tax.
The legislation would create a new tax break for small businesses, while increasing the tax rate for wealthier estates.
House Democrats, with the help of two Republicans, passed House Bill 2075 on Thursday by a vote of 53 to 33. But the Republican-led majority in the Senate has not said yet if it will pass the legislation.
Lawmakers are under pressure to act quickly because the state Department of Revenue plans to issue $12 million in refund checks by Friday if the Legislature doesn’t take action, with millions more in refunds in the following weeks. That would increase an already hefty budget shortfall that legislators would have to fill through other means.
DOR had been holding off on the refunds in case the Legislature passed a law that lets the state keep the taxes. The agency said it was “giving deference to the legislative process.”
But those delays were challenged and several lower court rulings have ordered the state to begin issuing refunds. Agency officials have said they can no longer wait.
The estate-tax case deals with something called a Qualified Terminable Interest Property trust. It allows a spouse to transfer assets tax free to a surviving spouse and then onto other heirs upon the death of the surviving spouse.
Under federal law, the value of the trust was taxed only when the surviving spouse died. That also was the case in Washington until the state Supreme Court “Bracken” decision.
As a result of the court decision, the estate also cannot be taxed when the surviving spouse dies under this kind of trust, according to the Department of Revenue.
The proposed legislation would ensure that married couples would still pay an estate tax, said Rep. Reuven Carlyle, D-Seattle, chairman of the House Finance Committee.
“It’s not a comprehensive policy and political deal across the board. We just tried to reach agreement on Bracken and we’ve done that,” Carlyle said.
The current tax applies to individual estates worth more than $2 million. Taxes apply only to the portion of an estate above that amount. The assets of such estates are taxed at a graduated rate. The value of property used primarily for farming can be deducted from the taxable estate.
The key for Senate Republicans was to create a break for small businesses. In simple terms, small businesses valued at up to $4.5 million would not pay estate tax, and businesses worth up to $6 million would only pay estate tax on the $1.5 million above $4.5 million, so they would get a break too.
To make the legislation “revenue neutral,” the bill would make up for money lost through the small business tax break by increasing the tax rate on estates in the highest tax brackets by one percentage point.
Republican State Sen. John Braun, R-Centrailia, confirmed that there is a tentative agreement on the language of the bill, but that’s all.
Senate Majority Leader Rodney Tom’s office also said there’s been no decision whether to pass the bill in the Senate.
Senate Republicans have been pushing for Democrats to pass legislation the GOP favors, including controversial changes to the state workers compensation system, before addressing the estate tax change or other tax legislation.