Controversial bank tax passed in closing hours of 2019 legislative session now heads to state Supreme Court.

As the 2019 legislative session drew to a close, lawmakers passed a banking tax, which in November of that year drew lawsuits filed by two banking associations. At the time, as we discussed in in our newsletter, critics challenged both the substance of the tax and the process by which it was passed. In May 2020 a King County judge found the tax violated the Commerce Clause of the U.S. Constitution

Now, about two years after the tax was passed, the case goes to the state Supreme Court. The Associated Press reports,

The Washington Attorney General’s Office on Tuesday asked the state Supreme Court to uphold a new tax on big banks, a year after a lower court judge sided with the industry in finding it unconstitutional.

The 1.2% business and occupation surtax — a tax added on top of other taxes — was passed by the Legislature in 2019. It applies to banks that make more than $1 billion in annual profits, but it is assessed only on their economic activity in Washington state.


…the Washington Banking Association and the American Banking Association sued. The industry’s attorneys, including former Washington Attorney General Rob McKenna, said the tax discriminates against interstate commerce — in violation of the U.S. Constitution, which gives Congress the right to regulate trade among the states and generally bars the states from hindering interstate commerce.

The Lens reports,

Depending on how the court rules, the decision could have implications for two ongoing lawsuits against the newly enacted capital gains income tax. State Counsel Noah Purcell argued during the May 25 oral arguments that state lawrequires that a taxpayer must first pay a tax before challenging it in court. If the court concurs, then the plaintiffs in both lawsuits would have to wait until 2023, when the first tax filing is due.

HB 2167 sponsored by Rep. Gael Tarleton (D-36) was initially a title-only bill, but within 48 hours it was rewritten as a 1.2 business and occupation (B&O), or gross receipts tax, on financial institutions and approved by the state legislature. While the courts have upheld the use of title-only bills, the state high court heard oral arguments on May 25 regarding whether its disproportionate impact on out-of-state banks was intentional and illegal.

Representing the plaintiff, the Washington Bankers Association, was former state attorney general Rob McKenna. He told the court that 150 of the 153 affected banks are out of state and pay 99 percent of the tax, which means that out-of-state banks pay a B&O rate 68 percent higher than in-state banks.

No date for a ruling has been set.