After unveiling a series of clean energy proposals earlier this week devoid of a new tax, Governor Jay Inslee is now proposing a nine percent capital gains income tax, an increase to the business and occupation (B&O) tax rate and revisions to the state real estate excise tax to pay for his proposed $54.4 billion 2019-21 operating budget. If passed, it would represent a $10 billion spending increase from just two year ago.
The latest income tax proposal comes amid historically high levels of state revenue that has increased from approximately $29 billion in the 2011-13 biennium to an estimated $48 billion for 2019-21. The Washington Research Council notes that along with the new money the state has increased spending from the general fund by 44 percent. The surplus revenue was sufficient for the state Office of Financial Management to deem new collective bargaining agreements with public sector unions “financially feasible.”
In a statement, Senate Ways and Means Committee ranking member Sen. John Braun (R-20) said that “based on our current projections we’ll have billions more to sustain these investments and still improve special education and mental health. Yet somehow that is not nearly enough money for the governor. At a time when taxpayers are already providing billions more in higher tax revenue, he wants a 67 percent tax-rate increase that would hurt small businesses, an unconstitutional tax on income and a complete wipeout of the bipartisan property-tax reforms due to take effect in 2019.”
This budget proposal also marks the second time in the last three years Inslee has proposed a capital gains income tax in his operating budget, despite one state Department of Commerce official calling the lack of one a “selling point” for attracting new businesses to Washington and its absence included as part of a Puget Sound proposal for Amazon’s HQ2. The tax’s volatility inspired California voters in 2014 to pass a constitutional amendment placing a percentage of the revenue in savings during good years to prevent budget shortfalls.
While efforts to implement the tax in the past have failed to clear the state House and Senate, Inslee claimed that newly-strengthened Democrat majorities in both chambers at a Dec. 13 press conference means there’s a “really good chance that we’re going to adopt this as one of our measures.”
Under his proposal, the tax would apply to capital gains of $25,000 for individuals and $50,000 for joint filers. The tax would not apply to residential home, farm or forestry sales, though at nine percent it would be the fourth-highest rate in the country. Currently, Washington is one of nine states to have not a capital gains income tax.
If implemented, the tax is almost guaranteed to trigger a lawsuit for violating the state constitution’s one-percent cap on property taxes. While Inslee told reporters “I feel very confident that will pass constitutional muster,” every state with a capital gains tax along with the Internal Revenue Service classify capital gains taxes as part of the state and federal income tax.
Along with the capital gains income tax, Inslee is also proposing to swap out the real estate excise tax (REET)’s 1.28 percent flat rate on property sales and replace it with a graduated rate. Properties under $250,000 would pay a .75 percent rate, while properties between $250,000 and $1 would pay a 1.28 percent rate. The rate would increase to two percent for homes worth more than $1 million and less than $2.5 million would pay a two percent rate. Anything more than $2.5 million would pay a 2.5 percent tax.
Under Inslee’s budget, the B&O tax rate would also increase from 1.5 to 2.5 percent, a move expected to generate $2.6 billion between 2019-21.
At the press conference, he argued that the new money is needed to fund basic education beyond McCleary, address mental health issues and comply with a court injunction to fix hundreds of fish barriers on land managed by the Washington State Department of Transportation (WSDOT).
Combined, Inslee’s proposed operating, transportation and capital budgets would spend more than $1 billion on orca recovery efforts such as ramping up salmon hatchery production.
“Our Washington state orcas are being pushed to the edge of eternal silence,” he said.
Inslee’s budget also calls for:
- Allowing schools districts to levy up to 28 percent of their combined state and federal revenues;
- An investment of $93 million to Career Connect Washington initiative, a public-private partnership to connect students with apprenticeships;
- $17 million for the state Department of Natural Resources to hire 15 permanent engine leaders, purchase two helicopters, expand correctional camp fire crews and enhance wildfire training;
- Creating a Statewide Broadband Office for coordinating the deployment of broadband throughout the state; and
- More than $40 million to expand long-term care facilities and state-operated living facilities for mental health patients.
The state and House will release their respective budget proposals after the session starts on Jan. 14.