We work hard every day to provide for our families and during that time we pay numerous taxes on the fruit of our labor. In Washington, however, there is also the threat that our death may trigger an additional tax for our families to deal with after we’re gone.
Washington is one of just 14 states that makes death a taxable event by imposing an estate tax. Lawmakers in Washington tax the estate of a dead person if its assessed value exceeds $2.079 million, with the exemption threshold adjusted annually based on inflation. The minimum tax levied is 10 percent and maxes out at 20 percent, depending on the size of the estate. Washington’s maximum estate tax rate of 20 percent is the highest in the country. Family farms are exempt, but there is no exemption for family-owned small businesses, which are hit hardest by the death tax.
Making for an even more uneven playing field for small, family businesses in Washington is the fact that corporations do not pay the tax, and corporate ownership can change indefinitely without incurring the estate tax. Forcing families that own small businesses to pay an extra tax when ownership is passed from one generation to the next, puts these families at an unfair disadvantage compared to their corporate competitors. Most importantly, it is unfair, because the estate tax targets family-owned businesses that can least afford to pay it, while their larger, corporate counterparts are exempt.
In 1981, 67 percent of voters supported Initiative 402, which restricted the state’s estate tax to the federal credit, meaning the state portion could be written off federal taxes resulting in no increased tax burden for Washington families.
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In 2005, however, the legislature narrowly passed SB 6096, re-imposing a stand-alone estate tax in Washington. This proposal was adopted after the state supreme court overturned Washington’s estate tax and Congress began to phase out the national estate tax.
The bill was approved by just 50-48 in the House and 25-21 in the Senate, with an emergency clause, meaning a people’s referendum could not be run against it. A year later, in 2006, voters were asked to once again repeal a stand-alone estate tax in Washington with Initiative 920, but the proposal was rejected.
Since that time, however, Indiana, Kansas, Ohio, Oklahoma, North Carolina, and Tennessee have all repealed their estate taxes. New Jersey is also set to join them, with its estate tax scheduled for full repeal on Jan. 1, 2018.
According to the Department of Revenue, for estate tax collections during 2013-14, if the exemption had been $3 million, 414 out of 909 that owed the tax would have been exempt (46 percent), while still generating 94 percent of the tax collected ($254 million out of $269 million). This trend holds true for the partial 2015 estate tax data.
An increased estate tax exemption would further reduce the unfair impact this tax has on small businesses and family estates while somewhat reducing the sting of the family member’s death that triggered the tax.
Death should not be a taxable event. Washington should follow the recent lead of lawmakers in Indiana, Kansas, Ohio, Oklahoma, New Jersey, North Carolina and Tennessee by fully repealing our state’s unfair estate tax.
Short of that, lawmakers should increase the state’s estate tax exemption to at least $3 million, to help reduce the financial burden of death for a substantial number of small businesses and family estates, while still generating approximately 94 percent of revenues for the state.
The sting of losing a loved one is already painful enough without also having to deal with a tax for them dying.
Jason Mercier is the Government Reform director & Erin Shannon is the Small Business director for Washington Policy Center, a non-profit, non-partisan research organization with offices in Tri-Cities, Spokane, Seattle and Olympia. Online at www.washingtonpolicy.org