Washington state’s major employers and several key lawmakers are warning that $4.4 billion in new taxes under Governor Jay Inslee’s 2017-19 budget would threaten Washington’s economic recovery. If approved as drafted, the budget would lever the largest tax increase in state history.
Components include new taxes on income from capital gains and carbon emissions, plus increased business taxes. The scrum thickens when the legislature’s biennial budget session begins January 9.
Tax Alarm: Capital Gains, Carbon, Business Gross Receipts
According to the Washington Research Council, Inslee’s budget would add the following new taxes:
- $2.28 billion from a business and occupation (B&O) tax hike, on gross receipts. The rate would increase from 1.5 to 2.5 percent, though it would also raise the B&O tax filing threshold to $100,000.
- $1.07 billion from a $25 fee on every metric ton of carbon emissions, starting next July 1.
- $821 million from a 7.9 percent tax on income from capital gains earned via sales of stocks, bonds and other investments.
Ash Heap Of History
The capital gains tax is almost certainly headed for the ash heap of history, given fierce resistance in the State Senate, and among investors large and small who make the state’s economy and workplaces hum.
The carbon tax would layer under a costly carbon cap rule Inslee implemented earlier this year by executive fiat, and which has drawn a sharp legal challenge.
At its current level, the B&O tax has long been a sore point for entrepreneurs, and is widely considered by them to be a tax on income, although others stress that Washington has no universal income tax.
Efforts to implement a broad income tax in Washington by initiative have repeatedly failed. In contrast, five times Washington voters have approved measures requiring a two-thirds supermajority for state taxes to be increased. Each time, lawmakers or the high court has invalidated the supermajority requirement. It all adds up to deep tax aversion in a socially liberal state.
K-12 Funding At Issue
Inslee believes his proposed new taxes are vital if the state wants to meet the 2018 deadline imposed by the State Supreme Court in its 2012 McCleary ruling, for lawmakers to fully fund K-12 basic education.
However, Senate Republicans say the governor’s plan faces slim odds, and a McCleary solution doesn’t require new taxes.
His proposed operating budget would increase Near General Fund-State and Opportunity Pathways (NGF-S) spending from $38.2 billion in the current biennium to $46.5 billion. That $8.3 billion increase includes a $3.9 billion bump in K-12 spending, the lion’s share of which would go toward McCleary compliance.
Lawmakers, Employers Deeply Skeptical
The budget proposal has received a cold reception from lawmakers such as State Sen. John Braun (R-20), vice chair of the Senate Ways and Means Committee. In a December 14 statement, he said the new taxes would “hurt job growth and fail to provide the stable and dependable revenues our public schools need.”
Also critical of Inslee’s proposed taxes is the Association of Washington Business (AWB). The association has nearly 8,000 members including Boeing, Microsoft, and Weyerhaeuser. In a December 13 statement, AWB warned the taxes would “further erode the state’s ability to protect and preserve good-paying jobs” and “undermine Washington’s already uneven economic recovery.”
Carbon Cap Rule Was First Step
The proposed carbon tax included in Inslee’s budget would be on top of the carbon cap rule the state Department of Ecology approved earlier this year at his behest, without legislative approval. The rule for now applies only to major emitters but will ratchet down to cover mid-size emitters. The new carbon tax would cover all emitters.
In its September, 2016 “Concise Explanatory Statement,” Ecology acknowledged that costs to Washington employers over 20 years from the administrative carbon cap could be as great as $7 billion and statewide economics benefits as little as $2 billion.
The carbon cap executive order reflects Inslee’s difficulty getting environmental proposals through the legislature. In 2015, the House Democratic majority declined to bring Inslee’s cap and trade proposal to a vote. That same year he tried and failed to win legislative approval for a low-carbon fuel standard.
Inslee’s proposed new carbon tax represents the reprise of an idea recently deep-sixed by the state’s electorate. In November, voters soundly rejected I-732 to institute a carbon emissions tax, 59.25 percent to 40.75 percent. In his original proposal for the 2015-17 budget, Inslee also proposed a capital gains tax, which lawmakers ultimately rejected.
A Punitive And Poor Revenue Source
A tax on income from capital gains has been roundly panned by employers, including tech entrepreneurs.
In independent reports, both the Office of the California Legislative Analyst and the Washington, D.C.-based Tax Foundation have warned that capital gains taxes are a volatile and unstable form of revenue.
‘Zero To Low Probability’
Senate Majority Leader Senate Majority Leader Mark Schoesler (R-9) believes the three major tax ideas in Governor Inslee’s budget “have from zero to low probability” of winning passage.
During a December 14 press conference Inslee described his budget proposal as “the start of a conversation,” but he added that new revenue is required.
However, Schoesler told Lens “He’s (Inslee) going to be really disappointed.” Lawmakers have already pumped almost $5 billion more into K-12 since 2012 without new taxes. That shows that the state can continue to increase basic education funding in the same manner, Schoesler added.
Plan To Raid Rainy Day Fund Draws Fire
Critics also point to another troubling aspect of Inslee’s new spending plan: his call for taking money from the state budget stabilization account, also known as the rainy day fund.
That would require a two-thirds vote by both chambers of the legislature, and would face rough sledding in the fiscally conservative State Senate. Employers have previously warned against the unnecessary use of emergency funds by the state.
Schoesler also worries about squandering strategic fiscal reserves. “What happens when we have a real emergency and have to make hard decisions?” he said.