House Democrats have released their proposed 2017-19 operating budget that includes over $7 billion in increased basic education spending over four years and a variety of new taxes to pay for it, including a capital gains income tax. At a Monday, March 27 press conference, top-ranking House leaders argued their proposal would comply with the 2012 McCleary decision while providing sufficient funding for other state programs.
Although Senate Republicans noted the proposal adheres to the four-year balanced budget requirement, they nevertheless criticized the tax proposals to meet that balance. They also insist that the House must first be willing to pass the taxes for their budget before the Senate will consider approving budgetary spending.
New Taxes To Pay For New Spending
The House Democrat plan would add the following new taxes via HB 2186:
- A seven percent capital gains income tax
- A 20 percent business and occupation tax (B&O) surcharge while repealing some existing employer tax incentives (certain deductions would be provided for small businesses, plus an exemption for businesses with a gross income of less than $150,000)
- Replacing the 1.28 percent real estate excise tax (REET) with a progressive tax rate starting at .75 percent for properties worth less than $250,000. The highest rate would be 2.5 percent for properties worth more than $5 million.
- Stipulates that out of state retailers report taxes owed by Washington customers for online purchases
HB 2186’s sole sponsor is State Rep. Kristine Lytton (D-40), chair of the House Finance Committee. It has yet to be assigned to a committee. She told reporters Monday that “we looked very closely as a caucus, individually and working with a lot of people, of what we could put forth that wasn’t going to make our tax code more regressive.”
House Appropriations Chair Timm Ormsby (D-3) told reporters that their budget “represents a contract between generations. That’s what our budget is all about. It’s about family and obligations.”
“We fulfill our contract between generations by meeting our moral and constitutional duty to our kids to provide not just an average education but an exceptional education,” he added.
Collective Bargaining Agreements Fully Funded
Some major spending in the House operating budget includes $1.7 billion in K-12 staff compensation and $682 million for the collective bargaining agreements made between Governor Jay Inslee and public sector unions last year. The Senate Republican plan only funds a small portion of them.
The House operating budget would also create a new state agency, the Department of Children, Youth, and Families, which would be a merger between the state Department of Early Learning and various Department of Social Human Services programs.
The House plan would spend roughly $45 billion from the General Fund, the Education Legacy Trust Account, and the Opportunity Pathways Account. That is roughly $1.548 billion more than the Senate Republican’s proposed operating budget, which narrowly passed out of that chamber last Friday in 25-24 vote along party lines after a lengthy debate. The Senate operating budget relies primarily on a new local effort levy that replaces existing school district local levies to pay for K-12 spending, in addition to unexpected state revenue.
When asked about the constitutionality of the progressive REET tax, Lytton said they had shown the legislation to the state Department of Revenue as well as the state attorney general’s office. Under the Washington State Constitution, property must be taxed at the same rate.
Capital Gains Income Tax Under Fire
Although Lytton defended the capital gains income tax as an excise state, the Senate Majority Coalition accused House Democrats of trying to impose an income tax that will be legally challenged. In Seattle, activists are pushing a what they describe as a progressive capital gains income tax in the hope that it will trigger a court challenge and ultimately lead to a State Supreme Court decision overturning previous rulings that have declared income as property under the State Constitution.
Fiscal notes for similar legislation proposed in recent years have assumed “that because the capital gains tax is a new tax actions challenging its constitutionality will be filed in Superior Court.”
Washington is one of only nine states without a capital gains tax, which entrepreneurs and investors have argued gives the state a competitive advantage for attracting tech startups. All states that tax income from capital gains receive the revenue as part of the state income tax.
The Tax Foundation has recently highlighted the volatile nature of this tax. Policy Analyst Jared Walczak notes that “in a bad year they (revenue) all but vanish, making taxes on them (capital gains) remarkably unstable.”
The House proposed operating budget received a public hearing later Monday in Appropriations. Executive action is expected today.
Top-ranking House Democrats told reporters they intend to pass their operating budget by the end of the week. However, they don’t intend on passing any new revenue legislation for the budget until the spending portion is approved by both chambers. The move was criticized at a follow-up Monday press conference by Senate Ways and Means Chair John Braun (R-20), who said that “makes it very hard to get to a deal when they won’t show what’s politically possible. If they are not even willing to bring these to a vote in the Democratically-controlled House, then they’re just saying these are not politically possible.”
Braun: House Budget A “Wish List”
In a statement, he added that doing so makes their budget “a wish list that does not deal with the realities of governing. Once the House Democrats demonstrate that a majority of the House stands behind this plan, we can view it as a serious proposal.”
Ways and Means Vice Chair Sen. Dino Rossi (R-45) told reporters that “we already proved that you don’t actually have to raise taxes. The public’s already spending $3 billion more in this budget than we had in the previous budget.”