House budget includes capital gains tax

House budget includes capital gains tax
The House has proposed a supplemental operating budget that calls for less new spending than its Senate counterpart but assumes the passage of a capital gains tax proposal that cleared the House Finance Committee this week. Photo: Created by Photoroyalty - Freepik.com

The House’s proposed supplement operating budget released Feb. 20 doesn’t spend nearly as much as its companion proposal in the Senate, but it assumes the passage of a capital gains income tax proposal. The new tax and unanticipated state revenue would help pay for the $1 billion in state property tax reductions.

HB 2299, sponsored by House Appropriations Chair Timm Ormsby (D-3), increases overall spending by $529 million. That’s $300 million less than Governor Jay Inslee’s proposal ($879 million) and less than half of what’s proposed in the Senate’s budget ($1.2 billion). The reason: it does not incorporate the increase in school salaries for the next school year.

However, absent from all the budget proposals is a business and occupation (B&O) manufacturing tax rate reduction originally included in last year’s biennial budget. That provision was vetoed by Inslee, who argued in his veto letter that the process needed to be more transparent. Yet, reintroduced versions of the B&O tax bill in both the House and Senate have failed to garner public hearings.

An altered version of the proposal passed out of the House Finance Committee this week, though it only applies to rural counties.  Some panel members say the definition of “rural” is too limited.

The issue has also been raised by Kris Johnson, president of the Association of Washington Business. In a statement, he wrote that the bill “leaves out nine counties, including many that consist largely of rural areas, such as Kitsap and Benton.”

The state of Washington’s manufacturing sector has become a concern to both industry members and legislators, as well. Since 2000, its share of the state labor force has dropped from 12 to 9 percent, and over 10,000 aerospace jobs have been lost. That’s according to a recent report by the Economic Revenue Forecast Council (ERFC).

“Manufacturers in every part of the state need support,” Johnson wrote. “Manufacturing employment is down 14.2 percent statewide since 2000, with manufacturing jobs in urban areas declining more than manufacturing jobs in rural areas.”

Rep. Bruce Chandler (R-18) is the ranking minority member of the House Appropriations Committee. In a statement, he cautioned against further spending. “We know that these robust economic times will not last forever, and indeed, have not actually occurred in all areas outside Seattle. The rare and short-lived inflation of real estate values are not something to base a sustainable budget upon. I would hope lawmakers learned this lesson a decade and a governor ago.”

“We must avoid the temptation to spend every last dollar the taxpayers have entrusted to us,” he added. “Instead, I would like to see some of these extraordinary revenues used to ensure that this robust economy lasts longer and spreads to every corner of the state.”

Although the House budget doesn’t assume the passage of a proposed carbon tax, it does bank on a controversial capital gains income tax legislation that passed out of House Finance on Feb. 19. Although its backers tout it as an excise tax imposed on the sale of capital gains, tax policy experts point to bill language that says it taxes the actual gains and thus runs afoul of the state constitution’s one percent tax cap. The tax is expected to bring in more than $1 billion over the next four years.

Legality aside, the state is not strapped for cash, says Johnson. He wrote that it is “not only unnecessary and unreliable but is also constitutionally questionable. With state tax revenue soaring by more $1.3 billion above previous estimates, there is no reason to impose a new tax on Washingtonians that is certain to be challenged in court as an illegal income tax.

“Even if the court allowed it, we know from other states that revenue collected from capital gains taxes goes up and down like a roller coaster with the economy, making it an unreliable source of funding for schools and other important services,” Johnson continued. “And despite claims that it targets the so-called wealthy, a capital gains tax could harm small-business owners who are relying on the sale of their business to fund their retirement.”

Johnson’s observations match the caveats found in the fiscal notes of previous capital gains income tax proposals made in the state legislature. “Capital gains are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented here.”

The fiscal note also assumes “that appeals to the new tax would begin shortly thereafter.”

The House budget leaves $697 million in the budget stabilization account at the end of the 2017-19 biennium and $1.2 billion at the end of the 2019-21 biennium.

Meanwhile, Republican State Treasurer Duane Davidson is advocating for lawmakers to use the surplus revenue to pay off some $13.8 billion in unfunded public pension liabilities. That’s a $1 billion increase from 2016.

In a recent statement Davidson wrote: “It is good financial management to use unexpected revenue to pay down your most expensive debt. Many families do this when they get a windfall – they might pay off their credit card.  Washington State’s most expensive debt is our unfunded pension liability. It’d be great to try and change the culture in State government from always using new funds to expand programs to instead thinking about paying down expensive debt.”

Action is expected on the budgets by the end of this week.

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