Washington Judge Voids Tax Hikes

Published June 1, 2006

Washington state’s 2005-07 budget violates Washington’s tax and expenditure limit, according to a ruling issued March 17 by Snohomish County Superior Court Judge James Allendoerfer.

During the 2005 legislative session, lawmakers artificially increased the limits set by Initiative 601 by engaging in a $250 million “merry-go-round” fund transfer among three state accounts. The state contended the transfers increased the limits. The maneuver enabled legislators to add almost $500 million in new taxes and an equal amount of new spending without triggering a vote of the people as required by I-601.

Included in the new taxes were a Washington-only death tax and new taxes on cigarettes, liquor, and warranties. (See “Budget Discipline Collapses in Washington State,” Budget & Tax News, June 2005.)

In ruling against the state, Allendoerfer ordered the I-601 spending limit lowered by $250 million and invalidated the tax increases, barring the state from collecting them unless a proposal to do so is ratified by a vote of the people.

Upholds Intent of Voters

Allendoerfer wrote, “Here, the legislature exploited a loophole in I-601 for the express purpose of artificially increasing the expenditure limit so as to avoid a vote by the people on the new taxes included in the biennium budget. The loophole, designated ‘triangulation’ by the plaintiffs, and referred to by legislative staff as a ‘huge loophole,’ and the ‘magic three-for-one provision,’ has the potential of trumping the intent and spirit of I-601 altogether.”

Plaintiffs who sued the state over the budget maneuvers included the Washington Farm Bureau, National Federation of Independent Business (NFIB), Washington State Grange, Building Industry Association of Washington (BIAW), Washington Association of REALTORS, Evergreen Freedom Foundation, and taxpayer Steve Neighbors.

Voters approved I-601 in 1993 in response to the state’s largest-ever tax increase, imposed earlier that year. That increase remains the largest ever in the state. I-601 restricts the rate at which the budget can grow and requires any tax increase in excess of that limit to be ratified by voters before taking effect.

Death Tax Survives

While the judge’s ruling invalidates most of the taxes enacted in 2005, the death tax survived on a technicality. I-601’s taxpayer protections apply to the state’s general fund only. When enacting the death tax, the legislature dedicated the expected revenue to an off-budget account.

“The taxpayer protections of I-601 need to be tightened to avoid a repeat of the legislature’s death-tax gimmickry,” said Bob Williams, president of the Evergreen Freedom Foundation. “Otherwise the legislature will continue to circumvent I-601 by enacting ‘off-budget’ tax increases.”

Supporters ‘Thrilled’

Supporters of I-601 were excited about the judge’s decision, despite the survival of the death tax.

“We are thrilled with the judge’s decision, which affirms the initiative process,” Dean Boyer of the Washington Farm Bureau told KING 5 News in Seattle. “The judge sent a clear message to the state legislature that the people are a coequal branch of government, as spelled out in our state constitution, and that lawmakers must follow the laws adopted by the people through the initiative process.”

Also supporting the decision were Republican lawmakers.

“Last year, when Democrat budget writers raised taxes without a vote of the people and blew the lid off of the spending limits contained in voter-approved Initiative 601, Republicans in the legislature cried foul,” said state Sen. Joe Zarelli (R-Ridgefield), ranking member of the Senate Ways and Means Committee. “There was a general feeling among many of us that at best, these fund shifts and shell games violated the spirit of I-601 and the trust of the voters, and at worst, opened the door to unlimited budget increases and were unconstitutional.”

Democrats in the legislature, on the other hand, encouraged the state to appeal.

“I don’t think any of us know what it means,” state Rep. Helen Sommers (D-Seattle), chairwoman of the House Appropriations Committee, told The Olympian newspaper. “The message seems to be unclear and complicated. I’m assuming it would be appealed and go to the Supreme Court.”

State to Appeal

At a March 31 signing ceremony for the record $1.35 billion 2006 supplemental budget increase, Gov. Christine Gregoire (D) announced the state would appeal the judge’s ruling. That announcement came before state attorneys had reviewed the oral transcript of the ruling or agreed to the written order for the judge to sign.

Shortly after the governor’s budget news conference, the attorney general confirmed the decision to appeal.

Williams asked, “How can the governor, a former attorney general, decide to appeal a ruling she hasn’t even read? Rather than spending more taxpayer dollars to defend illegal tax increases, the governor should be more concerned with honoring the intent of I-601.”

Special Session Requested

The Senate vote on the budget maneuvers was 25-22. All votes approving the fund-shifting were by Democrats, with only one Democrat voting no. In the House, the vote was 56-42. Only one of the 56 votes in favor of the fund-shifting came from a Republican.

Hoping to take advantage of the renewed attention to the budget actions led by state Democrats, Zarelli called for a special session in response to the judge’s ruling.

“I think (a special session) would be good. I like the fact that it would give attention to what was done,” Zarelli told the Longview Daily News.

Democrats, however, see no need for a special session.

According to the Longview Daily News, state Senate budget committee vice chairman Mark Doumit (D-Cathlamet) said, “There shouldn’t be any need to go back for a special session. The bottom-line, I think, is the legislature needs to maintain the ability to write budgets in a fashion that a majority (of lawmakers) feels needs to be done.”

Next Steps Considered

Once the state determines the basis for its appeal, it is likely both sides will agree to a direct review by the state supreme court. I-601 supporters are confident the ruling will be upheld by the state supreme court upon appeal.

“Instead of repealing I-601, the legislature manipulated its protections, all the while telling the people it was honoring their will. Thankfully, legislators’ disingenuous budget gimmicks did not withstand the scrutiny of legal review or the light of day. We are confident the supreme court will uphold this common-sense ruling and the illegal taxes will be invalidated,” said Williams.

Jason Mercier ([email protected]) is senior budget analyst at the Evergreen Freedom Foundation in Olympia, Washington.