A tax-time reminder that the estate tax bears hardship on Washington’s family businesses
Rep. Ed Orcutt
is serving his third term in the state legislature from Southwest Washington’s 18th District, representing northern and eastern Clark County and eastern Cowlitz County. In the House of Representatives, he serves on the Natural Resources, Ecology and Parks committee and the Finance committee.
As the saying goes, there are two things in life that a person can count on – death and taxes. In 2005, the Washington Legislature decided to link these two things together by creating a new estate tax. For many citizens, this tax looked like a reasonable way to fill a budget gap – tax the rich. In fact, the estate tax was not necessary, and it is not the rich who get taxed.
In 1981, voters passed Initiative 402, which directly tied the state and federal estate tax together, meaning that the state did not add to the federal tax. Congress began phasing out the federal estate tax in 2001 because of its impact on businesses and job creation, but Washington businesses lost out because the Department of Revenue did not conform our law to the federal action.
The state Supreme Court ruled that Washington State could not continue collecting a separate estate tax. So, the Washington Legislature responded by passing its stand-alone estate tax.
I strongly opposed the estate tax for the following reasons:
First, it was unnecessary to use it to balance the budget. In 2003 vital state services were protected without raising taxes. In 2005, the budget was balanced as forecasted revenues rose with our improving economy. It was not just a result of a "hot real estate market" – about half of the $1.4 billion in additional revenue was unrelated to the real estate/construction markets. Many jobs were added in other sectors, proving that patience would have been more prudent than to pass new taxes.
Second, of the new taxes passed by the Legislature, the one most threatening to our economy is the estate tax. Many small businesses can have asset values that exceed the $2 million exemption. Equipment plus land and improvements could add up much more quickly than a small business owner might realize. This is especially true for those businesses in urban areas where real estate prices have skyrocketed. Imagine how much increase there has been in a Vancouver business’ property value, especially with the Growth Management Act.
Some argued that businesses could incorporate in order to avoid being taxed. But it makes no sense to force a business to pay attorney’s fees to avoid paying a tax. Why not just reject the tax and save the attorney’s fees? And rapidly rising values can make it hard for owners to know when they need to incorporate.
The estate tax assumes something that isn’t true for most businesses: plenty of cash on-hand. For example, on a $3.5 million business, the state estate tax would be $170,000 (plus the federal tax). There is no regard for actual cash on hand since ability to pay does not matter. Sell the business, sell equipment, or take out a loan – all of these could mean the end for the business and for their employees. And there is no consideration for the sweat equity of an heir who worked there.
Worse yet, businesses are already moving to Arizona, which is phasing out its estate tax. Last week, Services Group of America, a long-time Washington-based company, announced it will move its headquarters in order to avoid the estate tax.
I introduced HB 2841 to repeal the estate tax and restore the Initiative 728 voter-approved source of funding for smaller class sizes, to uphold the voters’ will when they passed I-402, and to protect businesses. After the Finance Committee Chairman refused to hold a hearing on the bill, I re-introduced it as HB 3306 and attempted to bring it directly to the floor for a vote. The motion failed and so the Legislature failed business once again.
It is important to remember that the state estate tax of 10 percent to 19 percent is on top of the federal tax, which can be as high as 46 percent. The onerous nature of the state estate tax hurts family businesses, job creation and wipes out any gains made with Congressional action in 2001.
Seems this time, the other Washington is the one that got it right.
