(The Center Square) – Washington Department of Revenue officials warned during the legislative session that provisions in the proposed income tax could present not just enforcement complications, but invite legal challenges aside from those it currently faces, new records obtained by The Center Square show.
While some of the advice offered was later reflected in changes made to the bill, other concerns went unaddressed. One key lawmaker on the new income tax advisory group says they intend to tackle those issues.
According to the public records, James Samans with DOR’s Legislative and Policy Division sent feedback to Senate Bill 6346’s sponsor Sen. Jamie Pedersen, D-Seattle, on Jan. 23 expressing concerns over its “complexity and the potential for unforeseen applications of the tax that could give rise to administrative issues and/or legal concerns.”
SB 6346 is currently facing a lawsuit by the Citizen Action Defense Fund alleging it violated the state Constitution’s requirement that all property taxes be uniform in nature. Since the 1933 Culliton decision, the State Supreme Court has repeatedly ruled that income is property as defined by the Constitution.
However, SB 6346 imposes a 9.9% tax on annual income of $1 million or more; some tax experts recently warned that due to the state’s capital gains “excise tax” imposed on income, that total percentage might be even higher.
The Center Square reached out to CADF for comment on DOR’s feedback but did not receive a response.
The Center Square reported in April that email communications between Pedersen and the State Attorney General’s Office reveal the primary intent of the bill was to overturn Culliton, something the DOR feedback implicitly acknowledge.
“Specifically, we have concerns that the complexity will make it harder to explain the tax in litigation and could give rise to additional challenges beyond overturning Culliton,” the DOR email states.
When The Center Square reached out to DOR for comment on the statement, Communications Manager Mikhail Carpenter wrote in an email that “this sentence is alerting the sponsor that as presently constructed the bill has complexities (identified in the feedback document) that could result in additional legal challenges beyond Culliton. The agency can, and does, provide this type of feedback to lawmakers when it identifies possible technical challenges and/or unintended consequences.”
He added that “the Department of Revenue is statutorily required to provide tax policy guidance to the legislature on proposed legislation that may impact the taxes the agency is responsible for. Feedback is provided in several ways but the most common is a sponsor feedback letter where the agency identifies potential administrative or technical issues. The agency’s role in providing feedback is to ensure that the proposed legislation is administrable, but it is not legally binding and what is incorporated is at the discretion of the Legislature.”
Income tax advisory group member state Rep. Ed Orcutt, R-Kalama, told The Center Square that the complexity of the law as written, combined with DOR’s lack of experience with an income tax, lends itself to a multitude of problems. DOR intends to hire around 300 new employees by 2030 to enforce the tax.
“One (DOR employee) may interpret it differently than another,” Orcutt said. “I’m really concerned not just about the court system, but about the administrative…and everything else. There’s going to be a horrendous opportunity for errors. And I say errors, not evasions. Will the department interpret it the same the CPA is interpreting it?”
He added that “the fact that they make it different than the federal code…adds complexity. More time and more cost to fill these things out. More time and more cost for DOR in administrating it. This clearly is not good tax policy. It should be simple, easy to understand, easy to administer.”
However, advisory group member and House Finance Chair April Berg, D-Mill Creek, told The Center Square the legislature knew during the session that tax would require additional work after its passage. Berg was the sponsor of an amendment to the bill that, among other things, created the advisory group.
While she says she hadn’t seen DOR’s feedback, she said “we knew we had to work through some of these issues. It’s really hard to do rule-making in legislation. If we don’t get it right, there can be confusion. We’ve got two years to get it done. What is being seen, and what is really good, is folks are seeing us talk together so we can get it right.”
Among DOR’s recommendations to Pedersen was to exclude federal long-term capital gains and losses from the tax base entirely. However, no related changes were made.
The DOR feedback also noted that “identifying individuals that may owe the tax could be difficult resulting in underreporting in the first few years of the tax.”
“Implementation by the department will require extensive resources, placing a significant burden on policy divisions and requiring extensive taxpayer education,” the Jan. 23 email states. “Taxpayers will raise many questions that will require careful review on a case-by-case basis.”
DOR also advised Pedersen on how to close a potential loophole by which people could avoid paying the tax due to how “resident” was initially defined in the bill. Originally, someone who “establishes to the satisfaction of the director of the department of revenue that the individual is in the state only for temporary or transitory purposes,” could avoid paying the tax.
That provision was eventually removed from the final legislation.
However, the section regarding the reporting obligations for professional athletes was retained despite DOR warning it “could cause political and optics issues with this tax.”
During their collaboration with Pedersen, the AGO advised that he remove the marriage penalty of $1 million. However, that provision was also kept.