By Cindy Alia 1/5/26
Concise Analysis of HB 2089 (Wildfire Alleviation Support Act) –
The Core Change:
Effective July 1, 2026, the bill amends RCW 82.04.29005 by removing the "located in more than ten states" qualifier for banking institutions. This eliminates the B&O tax deduction for interest on residential first mortgages (previously available to lenders operating in 10 or fewer states), subjecting all such interest income to Washington's B&O tax at the service rate (~1.5–1.8%).
Stated Intent vs. Actual Effect –
Critical Inconsistency
The intent section (Sec. 1) repeatedly claims the bill "aligns" the state "community bank" definition with the federal standard (banks with ≤$10 billion in assets), as recommended by the 2015 JLARC review, to target only large/"placeless" institutions while protecting true community lenders.
However, the operative amendment (Sec. 3) contains no asset-size threshold. It simply repeals the geographic preference entirely, taxing all lenders—large national banks, online lenders, and small local community banks alike.
From a legal standpoint, there's a notable inconsistency: The intent section (Sec. 1(2)(g)) states the act "aligns the state definition of a 'community bank' with the federal definition" (implying an asset-based threshold of $10 billion or less, per the 2015 JLARC review). However, the amendment in Sec. 3 does not introduce an asset-size criterion. Instead, it eliminates the state-presence distinction entirely, removing the tax preference for all lenders.
This could be interpreted as a broader repeal of the deduction under RCW 82.04.4292 for residential mortgage interest, generating more revenue than a targeted alignment would (e.g., per a 2024 DOR report, full repeal could yield around $55-70 million annually initially, escalating over time).This mismatch might invite future legal challenges or amendments if stakeholders (e.g., small community banks) argue the bill deviates from its stated purpose.
Interested people should monitor for clarifying rules from DOR or potential litigation, as the bill's fiscal impact estimates (citing $141 million in total 2023 taxpayer savings, with 65% to unintended large institutions) suggest the change targets "placeless" lenders but sweeps in smaller ones.
Serious Implications of This Inconsistency
- Legislative Intent Violation: Small community banks and credit unions lose a tax benefit explicitly intended to support local residential lending, contrary to the bill's stated purpose. This could invite legal challenges (e.g., claims of arbitrary classification or deviation from declared intent).
- Political and Practical Risk: Stakeholders may demand amendments or clarifying legislation before enactment. If enacted as written, it undermines the legislature's own findings and could erode trust in tax preference reviews.
- Broader Revenue Impact: The change will generate significantly more revenue than a true federal-alignment approach (potentially $50–70 million+ annually vs. a narrower targeting of large institutions).
Impacts on Real Property and Mortgage Markets
- Higher Borrowing Costs: Lenders are likely to pass the new tax burden through higher interest rates, origination fees, or points—potentially increasing mortgage costs by 0.1–0.3% for Washington homebuyers and refinancers.
- Existing Loans Affected: Tax applies to interest received after July 1, 2026, even on pre-existing mortgages.
- Housing Affordability Strain: In an already expensive market, added costs could reduce loan availability, slow home sales, and disproportionately affect first-time and moderate-income buyers.
- Positive Offset for Property Owners: Generated revenues fund wildfire preparedness and forest restoration (RCW 76.04.511), potentially stabilizing or increasing property values in fire-prone areas by reducing risk, lowering insurance premiums, and preventing post-fire valuation losses.
Other Noted Effects:
- Resolves potential Interstate Commerce Clause issues by creating uniform taxation, but deviates from the stated intent of the bill.
- Small lenders may argue equal protection violations, though courts typically defer to legislative revenue decisions.
Bottom Line for Lenders and those seeking or holding mortgages.
The bill prioritizes wildfire funding over preserving incentives for local lending. Borrowers should consider locking rates or refinancing before mid-2026. Lenders and real estate professionals must prepare for higher costs and monitor for possible amendments to introduce the promised asset-based carve-out. The gap between stated intent and actual language creates meaningful uncertainty and risk of future correction or challenge. Carve outs in previous legislation on this topic will vanish under this bill and all lenders will be subject to a B&O tax on loans. This cost would most likely be passed on to the usual burden bearer, the consumer.
HB 2089, linked here can be easily read in its present 4 page status.
January 5, 2026