Bank groups file challenge to controversial new tax passed at close of 2019 legislative session

Two banking associations are suing the state Department of Revenue over a tax measure passed at the last minute by the 2019 Legislature, the Associated Press reports.

The Washington Bankers Association and American Bankers Association want the court to invalidate House Bill 2167, which increases the business and occupation tax on financial institutions with an annual net income of at least $1 billion. That currently affects 20 institutions, all based outside of the state.

The tax increase, which takes effect Jan. 1, was part of lawmakers’ two-year state budget plan and is expected to bring in about $133 million for the current budget cycle.

The lawsuit filed Nov. 5 in King County Superior Court argues that the measure — expected to bring the state about $1 billion over the next decade — violates the state constitution and the commerce clause of the U.S. Constitution.

As the lawsuit states, it was a hasty, last-minute fix.

The groups say the fact that the content of the bill was not available until the last 48 hours of the session violates a section of the state constitution that requires legislation to be introduced at least 10 days before the adjournment of a legislative session.

MyNorthwest writes that objections to the tax were raised immediately.

It was one of the big tax bills passed by the Legislature in the 2019 session and one that a handful of lawmakers – including one Democrat – called on Governor Inslee to veto.

Read the lawsuit here. It includes a sharply-worded attack on title-only bills used to circumvent constitutional requirements for “timely introduction and consideration of legislation.” In particular, the suit states,

The House Finance Committee held a single public hearing on SHB 2167 the same day it was introduced, April 26. During the hearing, the Committee’s staff fiscal analyst was unable to answer questions raised by legislators concerning the number of in-state and outof-state financial institutions that would be subject to the proposed tax. At the hearing, Representative Drew Stokesbary, 31st District, questioned whether SHB 2167 raised “potential dormant Commerce Clause impacts if we are only applying taxes to out of state businesses”—a question that went unanswered by Committee staff or by the bill’s sponsor, House Finance Committee Chair Tarleton. In connection with the hastily convened hearing, testifying members of the public, including Plaintiff WBA, objected that they had no meaningful opportunity to  review the bill, and raised concerns that legislators had not properly vetted, or even identified, the consequences of nearly doubling the effective B&O tax rate on an undisclosed number of financial institutions. No fiscal note was available for review during the hearing, as the bill’s sponsors had only requested one from the Office of Financial Management the day before, on April 25.  

The old line about sausage and legislation comes to mind.

In our post on the tax last May, we cited Crosscut coverage by Melissa Santos, who wrote,

[State Rep. Gael Tarleton, D-Seattle], who chairs the House Finance Committee, said the last-minute bank-tax bill was needed after Senate leaders once again rejected the House’s proposal to enact a capital-gains tax. That tax, which House Democrats used as the basis of their budget proposal in March, would have affected “extraordinary profits” received from selling stocks and bonds.

“The reason it happened at the end game is that we didn’t know until the end game that we needed some revenue to close a hole in the budget,” Tarleton said Wednesday. “If that option play had not been run, we would still be in session.”

You’ll remember that the Legislature increased spending 18.3 percent. Surely, there were other options.