Senate budget includes income tax, reflects “shared values”

Senate budget includes income tax, reflects “shared values”
The Senate budget proposal spends less than its House counterpart, but includes similar new taxes including a separate capital gains income tax proposal.

Although the Senate proposed $52.2 billion 2019-21 operating budget unveiled on Mar. 29 spends almost $700 million less than the House’s proposed budget, it contains several new taxes or tax increases intended to support the $7.5 billion increase in spending from the 2017-19 biennium.

During a Mar. 29 press conference, Senate Ways and Means Committee Chair Christine Rolfes (D-23) said that “the budgets are different, but they’re based on shared values. We may spend more in one area, they spend more in another, but we value the same things, so I expect the negotiations will be cordial and efficient.”

Senate budget writers also said at the press conference that they plan to incorporate a capital gains income tax into their budget under PSSB 5153, which is also included in the House proposal. However, the Senate’s capital gains tax would ostensibly cover a tax cut on small business and eliminate sales tax on certain items, while funding a working families tax credit.

If the provision survives the final version approved by the legislature and signed by Governor Jay Inslee, a legal battle is almost certain to ensue. Already, the Freedom Foundation has vowed to challenge the tax in court for violating the state’s constitution regarding property taxes, which includes income. All taxes on property must be uniform.

In a statement, Freedom Foundation CEO Tom McCabe wrote: “graduated taxes on income, including income from capital gains, are clearly forbidden. That was true last year; it’s true now; and, unless the constitution is amended, it will be true every time it’s tried.”

Washington Policy Center Government Reform Director Jason Mercier and Tax Foundation Senior Policy Analyst Jared Walczak have also repeatedly argued that a capital gains tax is a tax on income. It’s a position held by every state department of revenue, along with the Internal Revenue Service. A recent document put out by the nonpartisan Minnesota House Research Department also describes capital gains taxes as income taxes. All states with capital gains taxes are included as part of the state’s income tax, and there is no state with a standalone capital gains tax.

Aside from a capital gains income tax, the Senate budget would also restructure the real estate excise tax (REET) from a single flat rate to a graduated rate based on the property sale price, which is expected to generate $421 million in new revenue. Another proposal would eliminate a sales tax exemption for people from states without a sales tax. An increase to the state insurance premium tax from 2 percent to 2.52 percent would provide almost $100 million to pay for wildfire and forest health efforts.

The proposed budget would include funding increases for the following:

  • $3.9 billion for K-12 education;
  • $507 million for school employee benefits;
  • $470 million for public sector collective bargaining agreements; and
  • $156 million for special education.

If enacted as written, the Senate budget leaves $564 million in the Near General State Fund (NGF-S) account at the end of the 2019-21 biennium, with $2.97 billion in the rainy day fund. By 2021-23, it would leave $77 million in the NGF-S.

In a statement, Senate Ways and Means Committee ranking minority member John Braun (R-20) called the budget proposal “a much better start than what we’re seeing from the House,” though he added that “the tax increases in the proposed Senate budget are still unnecessary, and the spending is higher than necessary.”

House lawmakers approved its 2019-21 budget via HH 1109 in a 56-38 vote, with four excused. It has not yet been referred to a Senate committee. PSSB 5153 is scheduled for an April 1 public hearing in the Senate Ways and Means Committee, with executive action planned for April 2.

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