Washington state has the highest death tax rate in the country, and HB 1456 sponsored by Rep. Tina Orwall (D-33) would increase that rate for higher taxable estates and use a portion of the revenue to fund a housing equity account. While proponents say it will make the state tax code more progressive and aid affordable housing efforts, critics warned at the bill’s Feb. 9 public hearing in the House Finance Committee that it would hit small business owners particularly hard.
“We’re not really too concerned about billionaires,” Washington Policy Center Research Director Paul Guppy told the committee. “I think they can take care of themselves. It’s really small business owners…they’ve already paid taxes on what they’ve earned throughout their lifetime, and then death becomes a taxable event.”
He added that the rate increase would make the 30 states without a death tax “more attractive for high wealth individuals.”
Orwall said the bill is asking the wealthy to “share their family’s legacy for a greater good,” while Institute for Policy Studies Director of the Program on Inequality Chuck Collins said “a progressive estate tax will move Washington state in the right direction. Maintaining a progressive estate tax will make this system more equitable and fair.”
The current death tax rate ranges from 14-20 percent for taxable estates of $1 million or more. Under HB 1456, the top rate would increase to 40 percent and create new rate brackets that include estates worth $1 billion.
Professor David Gamage is a scholar of tax law and policy at Indiana University’s Maurer School of Law and served as special counsel to the U.S. Department of the Treasury’s Office of Tax Policy. He told the committee that Washington’s death tax compensates for the lack of a state income tax. “This bill would further move Washington state in a positive direction away from being the most unfair, inequitable, upside-down of all tax systems.”
Yet, National Federation of Independent Business (NFIB) Washington State Director Patrick Connor argued that even with some exemptions in the bill it still “adds to the regressivity that small business owners in our state face. Large corporations don’t pay the death tax. It’s the small business owners.”
He added that if enacted the new rates would force many businesses to close in order to pay off the taxes owed. As others have noted over time, the estate tax particularly hits family farms and was cited as the reason for why the last farm in Issaquah was sold for residential development.
Washington Retail Association Senior Vice President of Policy and Government Affairs Mark Johnson said that 90 percent of the organization’s members are small businesses, meaning they employ fewer than 50 people. “This measure if adopted would impact many of these small retailers. This business is their saving account. A small business has been paying an assortment of taxes for many, many years.”
Association of Washington Business Tax & Fiscal Policy Director Tommy Gantz noted to the committee that a state tax structure work group is still examining potential changes to the tax code and the legislature should wait until the group completes its work. “We’re still in the middle of a pandemic, and our economy is still very fragile. We don’t believe this is the time to raise any taxes. While it’s tempting to use these taxes to increase the budget, more economic activity will generate additional revenue.”
While criticism has been levelled against the state tax code for its reliance on a sales tax and property tax, WPC Government Reform Director Jason Mercier wrote in a blog post that the state “has consistently ranked as having relatively stable tax collections compared to other states. The reason for this is Washington’s three major tax sources (sales, gross receipts, and property) are among the least volatile taxes.”
He further wrote that “Washington’s current tax structure doesn’t need to be blown up but there are common sense reforms that can be adopted to actually provide tax relief.”
No further action is scheduled on HB 1456.