Northwest News

We in Washington pay highest estate tax in the nation. There’s a reason, officials say

For Jason Mercier, the time around Halloween is a reminder of how Washington is among the states that rely on the Grim Reaper for a slice of its tax revenue.

“Sadly, Washington is among the few states still counting on death to fund certain programs,” said Mercier, director of the Center for Government Reform with the Washington Policy Center, a nonprofit free market group.

Washington has the nation’s top graduated rate in its estate tax — at 20 percent — and is the only state without an income tax that levies a death tax, according to the Tax Foundation, a conservative think tank in Washington, D.C.

There’s an important reason why, Democratic lawmakers say.

Besides the revenue it brings in, the estate tax helps combat the state’s regressive tax system. A regressive tax is one that is applied across-the-board, taking a larger percentage of income from lower-income earners than from higher-income earners.

“Low income and middle income (earners) pay much higher proportions of their incomes than the wealthy, mostly because we don’t have the income and the capital gains tax, and we’re really dependent on the sales tax and the (business and occupation) tax,” said state Sen. Christine Rolfes, the Bainbridge Island Democrat who is chairwoman of the Senate Ways & Means Committee.

In 2018, Washington ranked first among states with the most regressive tax structure, according to a study by the Institute on Taxation and Economic Policy, a liberal think tank in Washington, D.C.

Washington’s death tax, which kicks in for those with estates of $2.2 million and above, has generated from $134 million to $203 million a year in recent budgets. The rates range from 10 percent to 20 percent, depending on the estate’s size. The funds are spent on K-12 education.

The federal and state governments use estate taxes to generate revenue from the transfer of wealth and property from the deceased to their heirs.

A recent study by two researchers had some eye-opening — and downright ghoulish — information about Washington and the estate tax.

Namely that if Amazon CEO Jeff Bezos — the nation’s wealthiest person and a Washington resident — died today, his estate would face a tax bill of nearly $12 billion. That would increase Washington’s tax revenue from all sources by about 52 percent in one year.

Why is that relevant?

The researchers, Enrico Moretti of the University of California, Berkeley and Daniel J. Wilson of the Federal Reserve Bank of San Francisco, did a deep dive on whether state estate taxes have an effect on where billionaires live.

They found that 43 percent of billionaires 65 and older moved to a state without an estate tax after initially living in one with a death tax.

Rolfes noted that the super-wealthy use estate planning to reduce how much their estate will owe.

“They all know how to hide their money. They have lawyers, and lawyers make a lot of money helping with estate planning,” she said.

Mercier said those are who most impacted by the death tax are the estates of individuals and small businesses that are slightly above the $2.2 million threshold and can’t afford the legal expertise that would help cut their tax bills.

“Who you are hitting are those who can’t do the estate planning,” he said.

Nonetheless, Washington state budget writers can only hope that Bezos will take after Bud Walton. The co-founder of Walmart died in 1995 and his estate paid a tax to Arkansas that increased that single source of revenue by 425 percent.

There’s also a reason why budget writers should be concerned.

Until the early 2000s, it didn’t matter much to wealthy individuals where they lived. The federal government provided a tax credit that in most cases meant that the estates of the rich paid the same amount regardless of the state they called home.

That all changed after a tax-cut package Congress approved in 2001, at the urging of then-President George W. Bush, that replaced the federal tax credit with a deduction that is much less valuable.

The nation went from a time decades ago when 50 states and the District of Columbia collected an estate tax to today, when only 12 states and D.C. have one in effect. Oregon has one, but Idaho and California don’t.

“Folks can’t escape death, but they could avoid the death tax Grim Reaper with a simple jump of the state line while still breathing,” Mercier said.

James Drew covers the state Legislature and state government for McClatchy’s Washington papers: The News Tribune, The Olympian, The Bellingham Herald and The Tri-City Herald.