Washington asks state high court to uphold tax on big banks

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.

Lawmakers said they designed the measure, along with a similar surtax on big tech companies, to begin to fix Washington’s regressive tax system by raising revenue from businesses most able to pay.

But 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.

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McKenna is also representing groups suing over Washington’s just-inked capital gains tax, another effort by Democrats in Olympia to make the state’s taxation more progressive.

McKenna told the justices that of the 153 financial institutions that had to pay the tax during the first quarter of 2020, 150 were based out of state. Out-of-state entities paid more than 99.7% of the $34 million collected during that period, he said.

"The surtax targets out-of-state banks that participate in interstate commerce," McKenna said. Referring to comments made by then-Seattle Democratic Rep. Gael Tarleton, he added: "Legislators were assured by the bill’s sponsor on the floor ... that only out-of-state banks would pay it."

King County Superior Court Judge Marshall Ferguson sided with the banks last May, ruling that while the bill had a discriminatory effect on interstate commerce, even though as written it would apply equally to big banks based in Washington state or outside it.

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Washington Solicitor General Noah Purcell told the justices such reasoning would lead to absurd conclusions. He gave this example: If states couldn’t approve taxes that are written neutrally but which wind up affecting more out-of-state businesses than in-state ones, Washington wouldn’t be able to tax tobacco.

"In-state entities and out-of-state entities are treated exactly the same, depending on their profit," Purcell said. "Any bank with less than a billion dollars in profit can operate here without owing the surtax, no matter where they’re based."

The case drew a friend-of-the-court brief from labor and community activists, including the Washington Black Lives Matter Alliance, who argued that the tax was a legitimate way for lawmakers to target Washington’s tax system, which disproportionately burdens low-income people. The state’s middle class and poor residents pay two to six times as much of their income in taxes as the wealthy do, lawmakers found.

The justices did not say when they would rule.