Inslee signs estate tax fix into law

OLYMPIA — A legislative fix to a court ruling on the estate tax was signed into law by Gov. Jay Inslee early Friday morning, hours before the state was to start issuing millions of dollars in refunds.

Inslee signed the bill, joined by Democratic and Republican lawmakers from the House and Senate, shortly after the Senate approved the measure on a 30-19 vote just before midnight Thursday. The Senate vote came after a full day of negotiations following passage by the House Thursday morning.

“This is a good step forward in our effort to improve the financing for the education for our children,” Inslee said before signing the bill.

Officials with the state Department of Revenue had said the state could have to pay out $160 million over the next two years if the fix isn’t made to the law. The figure includes money lost through refunds and a decline in future collections.

Lawmakers scrambled to reach a deal in time to prevent the first $13 million the state agency said it would have to send to 10 estates before a 9 a.m. court hearing on Friday. The measure passed Thursday night was a legislative workaround to last year’s ruling by the state Supreme Court, which determined the estate tax did not apply to married couples who had used a certain type of trust in their estate planning.

Sen. Sharon Nelson, D-Maury Island, stressed the looming deadline, saying the state risked mailing out checks “for funds that could be used for our kindergartners, for our third graders.”

“We need this action now,” she said.

The Department of Revenue said it has already received 70 refund requests totaling more than $40 million from estates that had paid the taxes before the court ruling. Others have gone to court to seek refunds.

The bill closes the marital trust exemption, while also increasing the tax rate on the largest estates. It also creates a deduction up to $2.5 million for family-owned businesses where the estate’s interest in the business is valued at $6 million or less.

“We close a loophole, we give some needed relief to our small family businesses and in doing all this we free up $160 million,” said Sen. Andy Hill, a Republican from Redmond who is the key budget writer for the chamber.

Others expressed concern about the retroactivity of the law, saying it was unfair and would likely be overturned by the state Supreme Court.

“The whole idea of retroactivity is generally considered unfair,” said Sen. Mike Padden, R-Spokane Valley. “We’re changing the rules after the fact.”

The Department of Revenue had previously warned lawmakers that in order to prevent the first of the refunds from being sent out, action must be taken before a 9 a.m. Friday court hearing involving an estate seeking a refund.

Prior judges have ordered the Department of Revenue to make refunds. In two of the cases, the court has sanctioned the department for opposing the refund requests and ordered it to pay attorney fees to plaintiffs. Officials said they had to be able to tell the judge Friday either that the law had been changed or that the checks were already in the mail. Because the bill has an emergency clause, it took effect as soon as it was signed by Inslee.

The agreement on the estate tax measure was the first significant agreement between the House and Senate on budget issues. Both chambers have been locked in budget negotiations for weeks. Democrats control the House and a mostly-Republican coalition controls the Senate. Lawmakers started a second, potentially 30-day special session on Wednesday after adjourning their first special session on Tuesday without a deal on the state operating budget.

“I think this is a very good step,” Inslee said after the bill signing. “But there’s still a lot of work to do on the budget.”

The Senate majority has been seeking movement on a handful of policy bills, and during passage of its budget last week, lawmakers said on the Senate floor that revenue-related bills, including the estate tax, would not pass without some of those bills, including one dealing with workers’ compensation settlements. The Senate took the vote on the estate tax after the House quickly passed a measure dealing with environmental cleanup funds. That measure was also signed by Inslee Friday morning. The Senate also passed a wide-ranging education reform bill Thursday night that is now being considered by the House.

Lawmakers face a $1.2 billion budget shortfall for the two-year cycle that ends in the middle of 2015 — an amount that doesn’t include money lawmakers are seeking for education in response to a Supreme Court ruling that the state isn’t fulfilling its constitutional obligations.

Inslee held a cabinet meeting Wednesday to discuss plans for what would happen if the Legislature doesn’t pass a budget by June 30, when the current budget cycle comes to an end. While the governor’s aides haven’t concluded which areas would need to shut down, they said potentially thousands of state employees could begin getting notifications about the prospect of temporary layoffs as early as next week.

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