Up and Down and Back Again: Troubled Childhood Notwithstanding, Washington's Stand Alone Estate Tax Deserves to Be Defended

• Publication year: 2006
• Citation: Vol. 29 No. 03

SEATTLE UNIVERSITY LAW REVIEWVolume 29, No. 3SPRING 2006

Up and Down and Back Again: Troubled Childhood Notwithstanding, Washington's Stand Alone Estate Tax Deserves to be Defended

Christine M. Mumford(fn*)

I. Introduction

Following close on the heels of the Washington State Supreme Court's ruling(fn1) that Washington must join the majority of American states in adopting the federally sponsored Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),(fn2) the Washington Legislature enacted and the Governor signed into law on May 17, 2005, an independent Washington Estate Tax.(fn3) Passed in both the state house and senate as Engrossed Senate Bill 6096,(fn4) the new scheme finds a balance between the pre-EGTRRA Washington tax laws and the contemplated EGTRRA conformation following the court's ruling. Because EGTRRA changed federally assessed taxes so dramatically and because Washington had not adopted any EGTRRA provisions, until the court's ruling and the enactment of Senate Bill 6096, Washington was assessing estate tax against many estates that owed no federal taxes.

Congress passed EGTRRA in 2001, creating a tax scheme that radically changed the computation of many taxes nationwide. One of the more dramatic changes effected by EGTRRA, at least in terms of the new planning and conformation necessitated, is the repeal of the federal estate tax.(fn5) Before EGTRRA, federal estate taxes entailed a steep assessment against death-time transfers above a certain exempt amount. Today, EGTRRA provides a declining rate of estate tax, culminating with complete repeal for at-death transfers occurring in the year 2010. In 2010, the laws may revert to their 2001 state(fn6) because of EGTRRA's sunset clause: all of the EGTRRA provisions will expire in 2011 unless Congress acts. The eventual elimination of estate tax makes the scheme favorable for taxpayers, but because this elimination is not certain to last, it also adds an element of uncertainty to preparation and planning. It is impossible to know whether the repeal will become permanent.(fn7) Many scholars believe that the tax will disappear permanently and many think it will not,(fn8) but waiting for the outcome unearths much uncertainty for estate planners.

Even without the added ambiguity of the sunset clause, however, EGTRRA is not a simple scheme. The most troubling effect of the changes for estate planning attorneys is planning for death benefits in a world where tax rates are no longer certain: the grim reaper, we can be sure, does not schedule visits around EGTRRA rate schedules.

Before the court's 2005 decision, Washington's estate tax scheme was far more complex, confusing, and uncertain than it would have been under EGTRRA. Because EGTRRA is a federal scheme, each state's participation is optional. Generally, states assess estate taxes in a way that parallels federal tax collection. At the national level, EGTRRA is more universally applicable than state schemes. Washington's pre-2005 approach, a purely passive scheme, assessed state taxes against the federal rates as they existed in 2001. All that Washington did, in simple terms, was refuse to conform to EGTRRA when it passed in 2001, and then fail to enact any subsequent legislation, thereby "freezing" the state tax rates at their 2001 levels. The Washington State Supreme Court, in a nod to those taxpayers who were offended by the state's scheme, called the Washington estate tax invalid because it assessed taxes in excess of those collected by the federal government.(fn9) Faced with either accepting Washington's frozen scheme or ruling that Washington must conform with EGTRRA,(fn10) the court's choice of the latter was sound, though neither option was ideally suited to address all of Washington's estate-tax related problems-problems concerning funding, the continuation of state resources, and the competing interests of wealth promotion and equitable taxation.

EGTRRA's estate tax provisions seem a good fit for the United States as a whole because nationally, estate taxes lag far behind sources like income tax in their power to raise revenue.(fn11) Eliminating estate taxes is a decidedly pro-taxpayer move. Estate taxes have long been criticized for harming American small businesses and for discouraging the ingenuity that often backs individual accession to wealth.(fn12) Taxing estates on death can seem harsh and un-American.(fn13) The temporary elimination of this tax provides an experimental means of measuring the ramifications of an estate tax-free society: EGTRRA's phase-out of estate taxes will provide law makers data with which to either justify reinstatement or abandonment of the taxes. The program will not be prohibitively expensive to the conforming states, as most states do not depend on estate tax as a significant source of revenue.(fn14) The repeal is, overall, an inexpensive way to assuage legitimate taxpayer concerns. Washington is unlike "most states," however; without an income tax,(fn15) it has few sources to fall back on for funding without taxing death-time transfers.

Of course, revenue is not the only reason for any tax. Moral implications and historical roots influence this kind of taxation on myriad levels. As Theodore Roosevelt put it in a 1906 message to Congress, "The prime object should be to put a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit of this country to perpetuate."(fn16) Estate tax is often viewed as a means of equalizing wealth, a view supported by a somewhat puritanical disapproval of idleness, a desire to ensure that citizens have worked for and have earned all that they have acquired.

At first it seems intuitive to praise the court for ordering what amounted to an effective ban on estate taxes. It seems, on some level, cruel to tax property that may not have been idly gained but may instead represent a lifetime of work. Though the decedent earner surely does not suffer for the tax, it violates some basic sense of fairness that these earnings are being shaved by government at his death. We must keep in mind, however, that the world of tax revolves not around the individual taxpayer; and what one man wins, another loses. Senate Bill 6096 attempts to address this inequity. More is at stake with the re-uprising of the estate tax than payment in excess of federal requirements. Invalid though it was after EGTRRA was enacted,(fn17) Washington had assessed an estate tax and had depended on its revenues for decades. Many of Washington's programs, including education and public welfare, had developed a dependency on these arguably ill-gotten gains.

Jumping from here to the steep EGTRRA phase-out would have been a terrible jolt to Washington's finances, and the legislature was right to enact a forward-looking bill. With Senate Bill 6096, the legislature enacted a Washington-specific estate tax that circumvented EGTRRA conformation. The new legislation assesses tax ranging from ten to nineteen percent on estates of more than $1.5 million(fn18)-thus, on estates that EGTRRA would leave untouched-and is effective immediately.(fn19) One of the problems with the pre-2005 Washington tax plan was that it taxed estates that had no federal obligations under EGTRRA, but this was mainly a concern of construction. By restructuring the way that taxes are assessed, the bill maintains the positive revenue characteristic of the pre-2005 scheme without its problematic structure.(fn20) The new tax is permanent, and will not disappear regardless of whether EGTRRA is renewed.(fn21)

As part of a larger biennial budget,(fn22) Senate Bill 6096 has been criticized as but another "sneaky" way for Democrats to fund their proposals without imposing a general tax.(fn23) While elements of easy balancing likely did come into play as this legislation passed, to understand the estate tax we must look beyond party lines and motivations to see the real effect on our citizens. The new law should not be seen as an end to Washington's estate tax problem, but should be respected as a step in the right direction: Washington's independent tax scheme, with maintenance and monitoring, can and will evolve to something that is as good for Washington as EGTRRA is for the nation. A complete phase-out of estate taxes would not be good for Washington's economy, which is why EGTRRA-conforming legislation should not have been and should never be adopted. Senate Bill 6096 gives the state something individualized and tailor-made to serve Washington's current concerns. The scheme needs to remain flexible, however; what works now may not work in the future. Small steps are necessary, and must continue to be taken. The Hemphill ruling was the first step, and the legislation was a positive second step. The third step is proactive vigilance by the legislature to preserve the pro-Washington benefits of the estate tax.

The Hemphill court correctly identified the rigid tax scheme during 2001-05 as contrary to voter intent and to the law. The legislature's enactment of Senate Bill 6096 was an appropriate response to the ruling but, as Hemphill and the pre-2005 structure teach, compatibility with changing times and needs is paramount. Death and taxes may be certain,(fn24) but the impact of taxes at death is not. The efficacy and workability of the bill is dependent on its applicability to Washington's needs today. As...