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Inslee’s budget ideas go into a contentious atmosphere

Gov. Jay Inslee Credit: John Stang

Gov. Jay Inslee believes $1.26 billion is needed for legally mandated education improvements in 2013-2015 — and he proposes $1.26 billion worth of closing tax exemptions and keeping expiring taxes to do that job.

That approach will be dead on arrival in the Washington Senate, retorted Senate Republican Caucus Leader Mark Schoesler, R-Ritzville.

Inslee unveiled his budget priorities and proposed revenue-raising measures Thursday. But he stopped short of announcing a full-fledged budget with detailed expenses for the 2013-15 biennium.

He identified 11 tax exemptions for closing, which would raise $565 million for the upcoming budget. And he wants to keep an otherwise-sunsetting beer tax and business and occupation service charge, which would tally another $661 million.

"I choose, and believe we should all choose, education over tax breaks. …. I know it won't be easy. … We'll see the evolution in people's thoughts as the numbers sink in," Inslee said.

A beer drinker himself, Inslee compared paying extra for beer with boosting education. "We've enjoyed this (taxed) brown liquid without destroying the economy. … Everybody who enjoys a beer ought to enjoy early education more," he said.

Meanwhile, Schoesler said, "I didn't see one [tax-exemption closure] I could support today. …  It's not a choice between kids and tax breaks, but between tax hikes and bureaucrats."

The battle lines are drawing up like this.

The current 2011-2013 state operating budget has $31.29 billion in revenue, $31.13 billion in expenses, and an expected $426 million left over when the biennium ends June 30.

Meanwhile, last week's state revenue forecast predicted $32.86 billion in operating budget income under the status quo. Inslee seeks $34.66 billion in revenue — a $1.8 billion increase. Two-thirds of that increase would come from Inslee's tax-related measures, and the rest would come from transfers to the operating budget from other funds. Inslee campaigned on a promise of no new taxes. But he does not view closing tax exemptions and keeping expiring taxes as tax hikes.

Inslee wants to spend $34.43 billion in 2013-2015. That includes $17.4 billion to keep the education system at its current status, plus the additional $1.26 billion to tackle the Washington Supreme Court's requirements to install full-day kindergartens statewide and to shrink the teacher-student ratios in schools by 2018, plus other measures. Inslee's staff calculated that $531 million would be left by June 30, 2015.

The Senate's 23-Republican-two-Democrat Majority Coalition Caucus is aiming to release its proposed budget next week, but cannot guarantee that. "When we do it, we want to do it right," Schoesler said.

Schoesler declined to say what the expected total figure would be nor how much the majority coalition believes will be needed to meet the Supreme Court's education fix-it requirements. Right now, the House Republicans say $817 million is needed in 2013-2015 to meet that mandate. Inslee now has a $1.26 billion target. House budget guru Ross Hunter, D-Medina, has talked about a $1.4 billion figure.  Rosemary McAuliffe, D-Bothell and ranking Senate Democrat on education matters, has mentioned $1.7 billion. Schoesler said the majority coalition's Supreme-Court-fix-it figure would "be in the range" of the House Republicans' and Inslee's numbers.

The Democratic-controlled House is supposed to unveil its proposed budget a few days after the Senate majority coalition announces its plan.

A major unknown is the Supreme Court, which will be looking over the Legislature's shoulder and can make its own determination whether that branch is following the justices' ruling.

A complicating factor is that Inslee and the Republicans appear to be using different ways to build their budgets.

Inslee built his quasi-budget proposal by taking 2011-2013 dollars figures — and then adding the dollar figures for increased population, university enrollments, medical costs and caseloads to create his baseline. From that, he then ponders whether to add or subtract money and programs.

Meanwhile, Republicans appear to take the 2011-2013 figures as their baseline, not factoring in growths in population, university enrollment, medical costs and caseloads. They appear to be using the original 2011-2013 dollar figures as the launching point to determine whether to add or subtract money and programs.

Inslee's attack on tax exemptions faces a pair of hurdles.

One is that every exemption has its stout defenders, and massive lobbying efforts to keep each loophole can be expected.

The second is that Inslee has in play his own proposals to create new tax exemptions. One is a bill to provide up to $2 million annually for two years in business and operations tax breaks for new businesses that manufacture industrial machines, computers, software, electronic products and Internet-related products — as well as providing credits for research in physics, engineering and life sciences ventures. He also wants to expand tax exemptions on large private planes being repaired or stored in Washington. And Inslee wants to allow newer businesses to sell their research tax credits to older firms.

On Thursday, Inslee defended his new tax exemption proposals as ways to nurture new, small high-tech firms.

The state has more than 630 tax exemptions in effect. The Legislature has terminated only a handful in the past several years. About 30 bills to create new tax breaks have been introduced so far in this session.

Here is a rundown of the 11 tax breaks that Inslee wants to close.

  • Limit the vehicle and boat trade-in exemptions from sales tax to the first $10,000 of value. This is expected to affect about 85,000 people in 2013-2015 and provide $94.8 million to the state during that time.
  • Repeal the sales tax exemption for local residential phone service. This is expected to provide $83.2 million in 2013-2015.
  • Repeal the sales tax exemption for custom computer software. This is expected to affect roughly 3,300 people and provide $78.5 million in 2013-2015.
  • Trim preferential B&O tax rates for most industries by 25 percent. This is expected to affect 7,524 businesses and provide $66.2 million in 2013-2015.
  • Repeal the sales tax exemption for non-residents. This is expected to provide $63.7 million in 2013-2015.
  • Repeal the sales tax exemption on bottled water. This is expected to provide $51.5 million in 2013-2015.
  • Repeal the use tax exemption for extracted fuel, which covers a factory or commercial operation's byproducts that are used internally as fuel. The exemption would continue for "hog fuel," which is made from wood byproducts at sawmills and similar facilities. Five plants would be affected. And $40.8 million would be provided in 2013-2015.
  • Eliminate the preferential tax rate for resellers of prescription drugs. This would affect roughly 40 businesses and would provide $29 million in 2013-2015.
  • Repeal the B&O tax exemptions for long-term rentals of commercial real estate. This would affect about 10,000 taxpayers, and would provide $27.8 million in 2013-2015.
  • Narrow the tax exemptions for import commerce. This would affect about 1,000 taxpayers and would provide $24.1 million in 2013-2015.
  • Repeal the sale tax exemptions for farm auction purchases. This would affect about 10,000 people and would provide $5.6 million in 2013-2015

For exclusive coverage of the state Legislature, check out Crosscut's Olympia 2013 page.

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