In 2019, when the Legislature imposed that extra 1.2 percent tax on those financial institutions that had a net income of $1 billion or more, many opponents argued it was unconstitutional, both as an infringement on interstate commerce and a system that discriminates based on the size of the bank. It wasn’t surprising when an association representing the banks filed suit to block the law, and the state Attorney General’s office defended it.
Both sides had good lawyers, with former state Attorney General Rob McKenna on the team representing the bankers association, up against some of the best litigators in the current office. A King County Superior Court judge agreed with the banks. Not surprisingly, the state appealed.
The state Supreme Court overturned the lower court ruling and said the law is constitutional based on rules that have evolved over time that allow states to “regulate matters of local concern.” It also doesn’t discriminate between in-state and out-of-state banks, because any financial institution that has more than $1 billion in net income is subject to the tax.
The 41-page majority decision, written by Justice Barbara Madsen, walks through a long line of cases that set up requirements for states that want to regulate interstate commerce, and explains why the tax withstands those tests. It also mentions that some legislators questioned its constitutionality, but said such concerns “do not exist in a vacuum. They must be considered together with the statements of other legislators.”
Madsen also makes reference to the state’s regressive tax system and the bill’s stated purpose of addressing wealth and income disparity that may make some opponents challenging another tax – the capital gains tax on high earners – a little nervous.
“These are legitimate government interests and the (bankers’) association offers no reason to question that the 1.2 percent tax will not serve them,” she wrote. In the end, six other members sided with Madsen that the tax meets the rules set down by previous court rulings to allow a state to regulate interstate commerce.
“The association understandably dislikes the higher tax rate it must now carry,” Madsen wrote. “But displeasure with a tax does not implicate the commerce clause, nor does it relieve those engaged in interstate commerce from their just share of state tax burden.”
And the other two members of the court? Justice Debra Stephens, joined by Chief Justice Stephan Gonzalez, wrote that those 41 pages of deep analysis weren’t really necessary. The law “does not discriminate against interstate commerce in purpose or effect … that conclusion should end our discussion.”