State high court examines bank tax

State high court examines bank tax

The State Supreme Court will decide whether a 2019 bank tax hastily enacted at the end of the legislative session violates the U.S. Constitution’s Commerce Clause regarding interstate activity after it was overturned in 2020 in King County Superior Court.

Depending on how the court rules, the decision could have implications for two ongoing lawsuits against the newly enacted capital gains income tax. State Counsel Noah Purcell argued during the May 25 oral arguments that state law requires that a taxpayer must first pay a tax before challenging it in court. If the court concurs, then the plaintiffs in both lawsuits would have to wait until 2023, when the first tax filing is due.

HB 2167 sponsored by Rep. Gael Tarleton (D-36) was initially a title-only bill, but within 48 hours it was rewritten as a 1.2 business and occupation (B&O), or gross receipts tax, on financial institutions and approved by the state legislature. While the courts have upheld the use of title-only bills, the state high court heard oral arguments on May 25 regarding whether its disproportionate impact on out-of-state banks was intentional and illegal.

Representing the plaintiff, the Washington Bankers Association, was former state attorney general Rob McKenna. He told the court that 150 of the 153 affected banks are out of state and pay 99 percent of the tax, which means that out-of-state banks pay a B&O rate 68 percent higher than in-state banks.

As written, the tax applies to banks that generate a total net income of $1 billion annually or more, but the tax itself is imposed only on revenue generated within Washington state.

Among the many notable cases cited during the oral argument was the 1981 ruling in Commonwealth Edison Co. v. Montana. In that case, the state had imposed a severance tax on each ton of coal mined. Out-of-state utilities sued, claiming it was discriminatory; the U.S. Supreme Court ultimately upheld the tax.

However, McKenna argued that “it has no application in the present case” because all the entities that directly paid the tax were based in Montana.

Purcell emphasized that the tax doesn’t treat financial institutions differently based on their location, only on their total profits. He also noted that the legislature’s intent with the bill was to make the tax code less regressive. While some justices questioned the relevancy of that point, the claim was meant to counter a separate assertion by McKenna that the bill was deliberately written to discriminate against out-of-state banks, citing floor debate remarks on the bill by Tarleton who said that the tax would apply to “the very largest banks in the world.”

However, Purcell claimed the remark was taken out of context: “she wasn’t offering an argument to vote for the bill,” but rather speaking in opposition to a proposed amendment.

McKenna also argued that the haste with which the bill progressed through the legislature is further proof of the bill’s discriminatory intent. When it reached the Senate floor for a vote, Senate Financial Institutions, Economic Development & Trade Committee Chair Mark Mullet (D-5) protested the fact that the bill had bypassed his committee and they were unable to get a legal opinion from State Attorney General Bob Ferguson over the potential violation of the Commerce Clause.

 Justices questioned to what extent the court should weigh bill sponsor statements when deciding the bill’s legality. McKenna cited the 1997 State Supreme Court ruling in Washington State Legislature v. Lowry, where thecourt’s decision referenced “unambiguous statements” of a bill amendment’s sponsor when determining its purpose. 

There is no set date for the court to issue a ruling in the case.

TJ Martinell is a native Washingtonian and award-winning journalist. Born and raised in Bellevue, he’s been involved in the news industry since working at his high school newspaper.

His investigative reporting for various community newspapers in the Puget Sound region has been recognized by the Washington Newspaper Publishers Association and the Society for Professional Journalists.

A graduate of Eastern Washington University, he has a B.A. in journalism and was the news editor of EWU’s student university newspaper.

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