Large banks operating in Washington state will have to pay more in taxes after a court upheld a state revenue-raising plan that specifically targets big financial institutions.
In a unanimous
The two-year-old law imposes a surtax on certain financial institutions with an annual company-wide net income of at least $1 billion, whether they are based in Washington state or elsewhere. Industry groups had contended that the law was nonetheless aimed at out-of-state banks in violation of the portion of the U.S. Constitution that gives Congress the right to regulate commerce between the states.
“While the Court ultimately disagreed with our arguments,” the Washington Bankers Association and the American Bankers Association said in a joint statement, “we continue to believe that a tax that is actually only paid by banks based out of state or otherwise heavily engaged in interstate commerce violates the U.S. Constitution.”
The law took effect on Jan. 1, 2020 and in the first three months of last year, the only period for which data was available, the Washington state government received $34 million in revenue from 153 financial institutions that were subject to the new law, including three companies based in the Evergreen State. The law covers not only banks, but also certain other companies that get more than half of their gross receipts from activities that a bank would be authorized to transact.
Under the law, financial institutions that meet the $1 billion net income requirement must pay a surtax equal to 1.2% of their gross income from Washington business activity. The surtax for large firms is in addition to a 2.7% tax on gross state income that applies to all financial institutions, regardless of their size.
The top five banks in deposit share in Washington state — Bank of America, JPMorgan Chase, Wells Fargo, U.S. Bank and KeyBank — are all based elsewhere. Spokespeople for the five banks, all of which reported more than $1 billion in net income last year, declined to comment on the court’s decision.
The state Supreme Court’s ruling was hailed by Andy Nicholas, a senior fellow at the Washington State Budget & Policy Center, one of several organizations that jointly filed a
“Washington has a notoriously regressive, upside-down state and local tax code,” Nicholas said.
The state legislature made a similar argument in a note attached to the 2019 tax law, which suggested that a tax on big firms will ultimately be paid largely by wealthy individuals who are more likely than others to be invested in the stock market.
“Washington’s tax system disproportionately impacts those with the least ability to pay. As a percentage of household income, middle-income families in Washington pay two to four times the amount of taxes as compared to top earners in the state,” the note read.
“The legislature concludes that those wealthy few who have profited the most from the recent economic expansion can contribute to the essential services and programs all Washington families need.”
The banking industry groups, in arguing that the tax discriminates against out-of-state banks, had pointed to remarks that a key legislative supporter made about encouraging a resurgence of local banks. But the state Supreme Court wrote that the statements were made in response to proposed amendments that were not adopted, and had been taken out of context.
The banking groups had also cited legislative talking points in support of the tax that said the levy would not affect local banks and would “help increase their competitiveness with big banks.” But the court wrote that those talking points offered “little persuasive evidence of discriminatory intent when weighed against the explicit, nondiscriminatory purpose” that was outlined in the text of the law and “echoed by lawmakers.”
In their joint statement, the Washington Bankers Association and the American Bankers Association criticized the state Legislature over its handling of the tax law.
“The Legislature considered the tax only in the last few days of its session, with very little public input and debate,” the two trade groups stated. “Legislation, particularly complicated tax bills, needs time to be adequately vetted by the public and lawmakers to avoid costing the state and taxpayers unnecessary time and money.”
The banking industry groups said that they will be evaluating their options following the state Supreme Court’s ruling.
One such option is to appeal the decision to the U.S. Supreme Court, said Michael Lurie, a tax attorney at Reed Smith who represents financial institutions that will likely be subject to the Washington state surtax.
Another potential path, according to Lurie, is for an out-of-state bank that is subject to a tax to file an administrative challenge before the Washington State Department of Revenue on the grounds that it is paying more in taxes than other locally based companies that do the same amount of business in the state. If such a challenge were successful, he said, other banks could follow suit.
