Fighting 'death tax' to the death
Sequim, WA - Robert Clark found he owed nearly $500,000 in federal estate tax, plus $90,000 in state inheritance tax, after his father died on Nov. 14, 1981.
Voters had just approved Initiative 402, prohibiting state death taxes, but it wouldn't take effect until January 1982.
"Dad died 45 days too soon," said Clark, owner of Clark's Chambers bed and breakfast inn in his family's restored Dungeness farmhouse.
"We ended up having to buy back the farm."
Over the 14 years then allowed for family farms to pay the taxes, the Clarks cut and sold timber on wooded portions of their land, including 40 acres they clearcut.
However, with no direct descendents living on Harvey Pettit's Three-Crabs land or Frank Eberle's Towne Road property, those estates weren't classified as family farms, Clark said. That meant heirs had only one year to come up with cash, forcing distress sales at prices that barely covered the taxes.
For 23 years under I-402, Washington just picked up a small percentage of federal estate taxes that the U.S. tax code allowed states to claim.
The pickup tax was phased out as of January 2005, but a legal opinion directed the state Department of Revenue to continue estate tax collections, Revenue spokesman Mike Gowrylow told me.
Last year, the state Supreme Court ruled that Revenue was illegally collecting estate taxes without legislative authority.
Almost immediately, the Legislature enacted a stand-alone estate tax as part of Gov. Christine Gregoire's 2005 revenue enhancement package.
Passed on a party-line vote, the 2005 revenue package was supported by Hoquiam Democrats Sen. Jim Hargrove and Rep. Lynn Kessler, while Rep. Jim Buck, R-Joyce, opposed it. The three represent District 24, which covers Clallam, Jefferson and part of Grays Harbor counties.
The new law affects estates with net values in excess of $2 million, but exempts family farms. Revenue predicts just one-half of one percent of deaths will be affected, generating a little less than $100 million from a projected 211 estates in 2006, Gowrylow said.
Effective tax rates begin at 1.6 percent on $2 million-to-$3 million estates, and rise to 16.8 percent on more-than-$25 million estates. The average rate is 9.2 percent.
Tax bills range from $4,000 to $7.98 million, with the average taxable estate paying $500,000.
But those who wrote I-420 still consider death taxes morally wrong.
They are circulating petitions to put I-920 on the November ballot. The "Abolish Washington State Death Tax" initiative needs 224,800 valid signatures by July 7, spokesman Dennis Falk told a Republican Women of Clallam County dinner forum on March 28 in Port Angeles,.
"If this doesn't get repealed, businesses will leave the state to protect their (owners') estates-jobs will disappear out of state," predicted Falk, who also spoke to the Sequim Realtors Association, March 29.
"It would be a travesty if we got rid of the federal death tax, and not the state," he said, noting that Congress seems headed for a permanent repeal of federal estate taxes.
Foundations and trusts protect huge estates from taxes, Falk said, while giant corporations profit from buying up small firms when families are forced to sell quickly at reduced prices to raise cash for death taxes.
Gowrylow, however, responded, "I don't think that's accurate." While proclaiming Revenue's neutrality on the topic, he doubts that the very wealthy tax shelter their entire estates, and believes that heirs who must cash out to pay taxes can find full-value buyers.
Jefferson County Assessor Jack Westerman said he is unaware of anyone in that county who has been heavily impacted by estate taxes, but rising residential values could inflate otherwise-modest estates to levels that would trigger the new tax.
Meanwhile, Clark's Dungeness farm is now valued at $4.2 million. With the inn as a major part of that value, and the fields leased to Harold Sofie, there's no guarantee it would be considered an exempt family farm.
I asked Clark if he plans to sign an I-920 petition.
"I already did," he said. "If I die tomorrow, our kids could find themselves in the same position I was in."
All about taxes
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