SHB 2089
SignedHouse
Taxes on loan interest
Supporting wildfire mitigation by modifying RCW 82.04.29005, concerning taxes on loan interest.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill changes how Washington taxes interest income from mortgage loans by tightening the definition of 'community bank' to match the federal standard ($10 billion or less in assets), removing tax breaks for larger, out-of-state financial institutions. Revenue generated from this change will be directed to the state’s wildfire response account to support fire prevention and community resilience efforts.
- Revises the definition of a 'community bank' for tax purposes to match the federal definition: banks with $10 billion or less in assets, rather than the current 'located in ten or fewer states' standard.
- Removes the business and occupation (B&O) tax exemption on interest income from mortgage loans for institutions that no longer qualify as 'community banks' under the new definition.
- Requires the Department of Revenue to estimate annual revenue increases from the tax change and notify the State Treasurer.
- Directs the State Treasurer to transfer estimated new revenues annually to the wildfire response, forest restoration, and community resilience account beginning in November 2027.
- Clarifies how to determine whether a financial institution is 'located' in a state (e.g., physical presence with borrower access), and defines key terms like 'affiliate' and 'interest' (including servicing fees).
Who is affected
- Financial institutions (especially large or 'placeless' banks) — Large financial institutions (those operating in more than ten states or with over $10 billion in assets) that currently benefit from the tax exemption on mortgage loan interest income — they will now owe Washington business and occupation (B&O) taxes on that interest income.
- Small community banks — Smaller, locally based community banks that meet the new federal-style definition (≤$10 billion in assets and physical presence in Washington) will continue to qualify for the tax exemption, preserving their competitive advantage in local lending.
- Washington residents — Washington residents may benefit indirectly through increased state funding for wildfire mitigation, forest restoration, and community resilience programs — potentially reducing future wildfire damage costs and insurance premiums.
- State agencies (DOR, Treasurer, DNR) — State government agencies, especially the Department of Natural Resources and the Office of the State Treasurer, will have new responsibilities to calculate, notify, and transfer funds to support wildfire response efforts.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (4)
The bill establishes a dedicated, annual revenue stream ($91.6M in 2023 dollars) to the wildfire response account, directly supporting forest restoration, community resilience, and fire prevention—reducing long-term costs from wildfire damage (e.g., infrastructure repair, displacement, health impacts), which disproportionately affect low- and middle-income households in fire-prone areas.
Public SafetyPeopleRef: Sec. 4(2); RCW 76.04.511 (as referenced in Sec. 1(2))Small community banks (≤$10B in assets and physically present in Washington) retain the B&O tax exemption on mortgage interest, preserving their competitive advantage in local lending and supporting continued access to affordable home loans in underserved communities—especially important in rural and wildfire-impacted regions.
Business & EmploymentPeopleRef: Sec. 3(1), amending RCW 82.04.29005(1)Closing a tax loophole that disproportionately benefited large, out-of-state institutions (65% of $141M in savings went to non-community banks) improves tax fairness and ensures the tax system supports institutions that reinvest locally, not those extracting capital without local accountability.
FinancialPeopleRef: Sec. 1(2)(d), citing DOR 2024 reportBy requiring physical presence and borrower access to qualify for the exemption, the bill discourages 'placeless' lending practices and may incentivize large banks to maintain local branches and customer service in Washington—potentially improving loan accessibility and responsiveness in vulnerable communities.
HousingLean peopleRef: Sec. 3(2), defining 'located' with physical presence + borrower access
Potential Concerns (4)
Large financial institutions (those operating in more than ten states or with >$10B in assets) will lose the B&O tax exemption on mortgage interest income, increasing their tax burden by an estimated $91.6M annually; this may reduce their profitability and could lead to reduced lending activity, higher fees, or job cuts—especially in non-Washington operations—though local branches may be unaffected.
Business & EmploymentIndustryRef: Sec. 3(1), amending RCW 82.04.29005(1)The new physical-presence test for 'location' and expanded definition of 'interest' (including servicing fees) create compliance complexity for mid-sized and regional lenders, potentially increasing administrative costs and discouraging participation in the Washington mortgage market—especially for institutions without physical branches in the state.
Business & EmploymentLean industryRef: Sec. 3(2)–(3), defining 'located' and 'interest'While wildfire funding is increased, redirecting revenue to a single-purpose account reduces legislative flexibility to allocate funds where needs are greatest across state emergency services (e.g., flood response, urban fire suppression, or public health), potentially creating underfunding in other high-risk areas over time.
Public SafetyLean peopleRef: Sec. 2, Sec. 4(2)The prohibition on DOR adjusting estimates after Treasurer transfer removes a built-in correction mechanism, increasing risk of over- or under-funding the wildfire account—potentially straining local governments that rely on predictable state fire mitigation grants or matching funds.
Local GovernmentLean peopleRef: Sec. 4(3)
Who Is Most Affected
Large, out-of-state financial institutions (e.g., regional banks with no WA physical presence but active mortgage servicing) will face a new tax liability of ~$91.6M/year, reducing their net income from Washington lending—though most can absorb this without major operational changes.
Small, locally rooted community banks that meet the $10B asset cap and have physical presence in Washington retain their tax exemption, strengthening their ability to lend locally and compete with larger banks—especially beneficial in fire-impacted rural counties.
Homeowners and renters in fire-prone areas (especially low- and middle-income) benefit from increased funding for fire mitigation, forest restoration, and community resilience programs—reducing future wildfire damage, insurance premiums, and displacement risk.
State agencies (DOR, Treasurer, DNR) gain new responsibilities but also increased authority and funding to coordinate wildfire response—DNR benefits from more predictable, dedicated funding for prevention and restoration work.
Mortgage servicers and real estate professionals may see modest impacts: some may face higher compliance costs if affiliated with non-exempt institutions, but overall market stability from reduced wildfire risk supports long-term demand for housing and lending.