Another loophole for the wealthy? Estate tax technicality may result in millions lost from education budget

The technical glitch, if not fixed by the legislature, will siphon $160 million out of Washington's Education Legacy Trust Fund, to which the estate tax is dedicated. It funds tuition assistance, higher education, and public schools.

If not fixed by the legislature, this technical glitch will siphon $160 million out of Washington’s Education Legacy Trust Fund. It funds tuition assistance, higher education, and public schools.

Washington’s estate tax, which applies to the sons and daughters of wealthy estate owners, provides dedicated funding for public schools and public higher education in Washington state, including tuition assistance. But a recent decision by the Washington Supreme Court has opened up a loophole that will allow many wealthy heirs to sidestep the estate tax altogether via a complex mechanism known as the Qualified Terminable Interest Property (QTIP).

This technical glitch “creates an inequality never intended by the legislature” according to two bills introduced to fix the problem – one a Democrat-sponsored bill in the House, the other a Republican-sponsored bill in the Senate. Unless the language of the law is clarified, the state’s education budget will lose $160 million in the 2013-15 budget cycle, and $40-$50 million per year following – and time is running out.

The Department of Revenue, which had been waiting on legislative direction before sending out the checks, was taken to court by the wealthy heirs who challenged the estate tax in the first place. The court ruled the DOR must begin issuing refund checks immediately. Mike Gowrylow, a DOR spokesman, says they will now begin to send the checks out. “We’ve decided that we can’t hold off any longer and will begin refunding the money.”

However, there appears to be disagreement in the legislature about how to close the loophole.

House bill 2064 – which heads to the House floor for a full vote today – simply reinstates the legislature’s intended meaning when it enacted the estate tax, and closes the QTIP loophole. The House bill makes no changes to the estate tax filing threshold – currently $2 million.

By contrast, Senate bill 5939 follows the maxim “Never let a good crisis go to waste.” While the Republican-sponsored SB 5939 closes the QTIP loophole, it also raises the threshold of the estate tax – doubling it to $4 million by 2016, and then applying the federal threshold thereafter. The federal estate tax was repealed in 2010, but has since been reinstated and the threshold is now more than $5 million.

The House and Senate will have to reconcile their bills – quickly – to avoid punching a $160+ million hole in education funding for their upcoming 2013-15 budget cycle. After all, with crumbling state infrastructure, tuition that has doubled in less than decade, and the state failing to adequately fund K-12 education, now isn’t a good time to give another tax break to Washington’s wealthiest 300 sons and daughters.

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