Stakeholders warn against new taxes in proposed 2021-23 operating budget

Stakeholders warn against new taxes in proposed 2021-23 operating budget

Governor Jay Inslee has released his 2021-23 operating budget that increases spending from the prior biennium and includes a capital gains income tax proposal to cover some of that new spending.

And although the proposal also includes relief for small businesses and tenants/landlords affected by the economic shutdown in response to COVID-19, Republicans and others say now is not the time to impose new taxes.

In enacted, the budget would represent a $5 billion increase in spending compared to the 2019-21 budget – up from $52.7 billion to $57.8 billion. It also represents a $13 billion increase from the 2017-19 biennium. Much of the proposed new spending would be covered by increase in state revenue that, despite the economic shutdown, represents an historic high for state collections. State revenue has increased every biennium since 2011-13.

Despite the historically high revenues, many industries in the state, including the hospitality sector, have been severely affected by Inslee’s COVID-19 restrictions. According to the latest data from the Employment Security Department, state unemployment is now six percent.

Washington Hospitality Association President and CEO Anthony Anton said in a statement that they have been the “hardest hit by the pandemic and the state’s response to it, which is why we’ve urged and will continue to urge Gov. Jay Inslee and the legislature to make relief for our industry an early priority in the 2021 session.” He added that keeping the industry closed costs them $800 million per month.

Inslee’s proposed budget would withdraw $100 million from the rainy-day fund to cover small business grants, and another $100 million from the fund to go toward rental assistance for both tenants and landlords. By the end of the biennium the fund would have $1 billion in reserves.

At a Dec. 17 press conference Inslee said that “our budgets must reflect the need for strong, robust, and comprehensive economic recovery for our state.”

One of the budget provisions would reduce an expected employment insurance tax increase, a move praised by Sen. Karen Kesier (D-33). During the Dec. 17 press conference she said that “I am especially happy to see that proposal, especially to address those small businesses in the hardest-hit economic sectors such as hospitality.”

Association of Washington Business (AWB) President Kris Johnson said in a statement that while they support funding for small business relief and rental assistance “we’re disappointed the governor is proposing any tax increases at this time. It’s not only a potential roadblock to economic recovery, it’s not necessary. Washington’s budget outlook has steadily improved over the last several months, making it possible to balance the budget without raising taxes.”

Anton noted that the relief proposed is “not sufficient to rescue our industry from the brink and provide an adequate path forward to recovery – which is why we’re developing a robust and comprehensive recovery package that we are hopeful the governor and lawmakers will embrace and support.”

During a Dec. 18 press conference Rep. Lynda Wilson (R-17) said that $100 million is “a drop in the bucket” compared to what industries like hospitality require. “They are struggling to stay afloat every day. I hear from them every single week, and they are beside themselves.”

Rep. Jacqueline Maycumber (R-7) said during the press conference that “you cannot continue to tax the industry that is suffering so much,” especially when it’s unknown what a post-COVID-19 economy will look like.

The proposed nine percent capital gains income tax also adds new fuel to the ongoing, fiery debate over both the state tax system as well as constitutional issues regarding income. Though pitched as a tax on the sale of the capital gains above $25,000 for individuals and $50,000 for joint filers, the state Office of Financial Management states that “the proposal applies [only] to long-term capital gains income.” Exempt from the tax would be sole proprietor income, retirement accounts, homes, farms, and forestry.

Washington Policy Center Government Reform Director Jason Mercier wrote in an email that “the IRS and every state revenue department in the country very clearly say that a capital gains tax is an income tax. Are they all wrong? There isn’t a single state without a personal income tax that taxes capital gains.”

While proponents of a capital gains income tax view it as a way to improve the state tax code by shifting the burden onto high-income earners, Mercier has argued that its primary purpose is to challenge the state’s prohibition on a progressive income tax – a fact some lawmakers in favor of the tax have admitted in emails.

The state high court has consistently ruled since the 1930s that income meets the definition of property and is found in a constitutional amendment added in the early 1930s in an effort to tax incomes at different rates depending on their class. The definition of property is: “everything, whether tangible or intangible, subject to ownership.”

Mercier further wrote that aside from the legality piece, having a stand-alone capital gains tax could affect the state’s business competitiveness; the lack of both capital gains and personal income taxes have been touted by the state Department of Commerce as reasons for businesses to locate in Washington.

Rather than enact a new tax, Rep. Drew Stokesbary (R-31) said at the Dec. 19 press conference that Inslee’s budget could have provided more funding for the working family tax credit. “I think the best word to characterize my reaction (to the budget) was ‘underwhelming.’ I would have thought that after eight years of practice he would be able to come up with a few new bold ideas. But apparently somebody told him the ninth time is the charm, and he took that to heart.”

The legislative session begins Jan. 11.

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