FILE - U.S. Supreme Court

Visitors walk outside the Supreme Court building on Capitol Hill in Washington, Monday, Feb. 21, 2022. 

(The Center Square) – The U.S. Supreme Court Monday refused to hear a case challenging a controversial Washington tax law.

The law, enacted in 2019, imposes a tax surcharge, in addition to other state taxes, on financial institutions with net income of $1 billion or more. Critics claimed the law was unconstitutional because it favored in-state banks at the expense of interstate banking companies.

The heart of the legal challenge to the law, RCW 82.04.29004, was that it violated the Commerce Clause of the U.S. Constitution, which forbids states from passing protectionist legislation against other states.

The lawsuit, brought by the Washington Bankers Association and American Bankers Association, claimed that the tax was narrowly written to apply almost exclusively to out-of-state financial institutions, since it would be difficult for institutions to generate $1 billion in net income by doing business in Washington alone.

According to the suit, 99.74% of the revenue generated comes from companies headquartered outside Washington.

The tax generates about $200 million every two years, according to the bill's fiscal note.

By refusing to hear the case, the U.S. Supreme Court let stand a September ruling by the Washington Supreme Court, which upheld the law.

The Washington court rejected the argument that the law targeted out-of-state institutions because it “applies equally to all financial institutions meeting the $1 billion income threshold, irrespective of whether they are based inside or outside of Washington.”

The state court also noted that while the tax is triggered by the institution’s net income from all parts of the world, the portion subject to the Washington tax is only the amount of net income generated in the state.

Washington Attorney General Bob Ferguson praised that decision at the time saying it “correctly applied the law and is a win for those fighting to make Washington’s tax system fairer.” Ferguson added, “I’m proud of my team’s work to uphold Washington’s new progressive tax on the tremendously most profitable large banks operating in Washington.”

Adding to the controversy surrounding this legislation, the bill had been introduced simply as “relating to tax revenue” without revealing its contents. The details of the bill were unveiled and passed in both houses of the legislature within 48 hours on the final days of the 2019 legislative session.

A bipartisan group of five legislators wrote to Gov. Jay Inslee urging him to veto the legislation on the grounds that it bypassed the established legislative process by not allowing public input. Inslee signed the bill without comment in May 2019.