Another tax legislative Democrats passed rashly last year is leading to unforeseen consequences, spurring state residents to reconsider their retirement plans.
In lawmakers’ quest last year for tax increases to keep up with their spending habits, a thin majority of Olympia’s ruling party jacked up the estate tax on the highest earners from 20% to 35%. That’s far and away the highest rate in the country.
Lawmakers must reverse this foolhardy move. Senate Bill 6347, sponsored by State Sen. Claudia Kauffman, D-Kent, would roll back estate tax brackets to pre-2025 levels. That’s a good start toward undoing one of many impetuous tax increases that’s now rippling through the state’s economy.
This isn’t a sympathy plea for the wealthiest Washingtonians. It’s a warning about levying a tax rate far beyond any other state. High-net-worth individuals possess the means to relocate their assets to more competitive tax climates. They may even decide to move away from Washington permanently. When they do, Washington loses far more than just estate-tax revenue. More on that later.
Here’s the backdrop. Just 17 states and Washington, D.C., charge their own estate or inheritance tax, according to the nonprofit Tax Foundation. And only one, Hawai’i, levies 20% on estate values north of $10 million. Washington lawmakers pushed the tax to a sky-high 35% last year on estate values above $9 million.
Though the tax took effect only in July, warning signs of its effects are starting to emerge. Take the curious influx of Seattleites buying homes in income and estate tax-free Nevada, as reported the Las Vegas Review-Journal this month.
“Starting in about September, we all of a sudden started seeing all these people from Seattle and it’s just grown since then,” Las Vegas Valley broker Darin Marques told the Review-Journal. Between California and Washington’s actual and proposed taxes, he called it a “full-scale migration of wealth.”
In a survey of 429 Washington employers earlier this year, 44% said they were considering moving their personal residence outside the state, according to the Association of Washington Business.
Those who choose to live out their days outside of Washington don’t just avoid the estate tax. They stop paying other taxes, too, including any capital gains, which Washington now levies at 9.9%. They will pick new charities, business investments and other places in their new homes to spend money.
As Senate Majority Leader Jamie Pedersen’s novel income tax proposal moves through the Legislature — and does more to scare away some taxpayers — so too should bills that reduce Washington’s reputation as an outlier on tax policy. To have the second highest sales tax, third highest gas tax and too many other rates above other states ultimately diminishes tax revenues, as employers grow jobs elsewhere.
“We can’t afford as a state to be leading the way in every high tax category,” Microsoft President Brad Smith told Austin Jenkins on TVW’s Inside Olympia earlier this month.
State Sen. John Braun, R-Centralia, noted in a news conference last week that Democrats’ bill to roll back the estate tax could be inferred as a “tacit admission by the majority that they got it wrong last year.” Democrats needn’t stop there. They could provide further relief to companies and entrepreneurs paying higher business and sales taxes, moves that will hurt the state economically.
More than anything, this lesson should serve as a deterrent to future Legislatures about the pitfalls of passing hastily constructed taxes. The estate tax increase passed the Legislature in just 10 days last April.
Lawmakers must commit to forming an economic vision that does more than maximize tax collections but can also optimize the state’s economic growth. When entrepreneurs create new companies and businesses can grow jobs, that too is a pathway to prosperity — and larger state coffers.
