A capital gains tax? Democrats want it. Republicans hate it.
An increased business-and-occupation tax on service firms? Democrats say it's needed. Republicans say it's too huge.
Funding McCleary with new taxes? Democrats say yes. Republicans say heck no.
Whichever way you look at it, Washington's House Democrats and Senate Republicans appear light-years apart when it comes to the 2015-2017 state operating budget. The $38.8 billion proposal that House Democrats unveiled on contains almost $1.5 billion in new taxes and tax break closures. Notably missing was the carbon emissions tax proposed by Gov. Jay Inslee, which Democrats say did not have the votes to pass the House.
In a few days, the Senate Republicans will announce their own, tax-free $37 billion budget proposal. (The 2013-2015 state operating budget is roughly $34 billion.)
The House Democrats have the 50 votes lined up they'd need to pass their tax measures said House Majority Leader Pat Sullivan, D- Covington. "Now's the time to start reinvesting in our communities, reinvesting in our families," Sullivan said. But if Senate Republicans have anything to do with it (and they do), legislative budget talks will likely go into overtime, extending beyond the session's original April 26 end date.
On Friday, Senate Republicans slammed any chance of budging on Dems' proposed tax increases. "While increasing state spending by $5 billion, the House still puts students last, tying education funding to tax increases," said Sen. Andy Hill, R-Redmond and the Senate Republicans' chief budget writer. "I’m not sure if that’s unconstitutional or just unconscionable."
Sen. Mike Baumgartner, R-Spokane, called the proposal “unbalanced and fiscally irresponsible" and said it "sets the state on a course for a government shutdown." "Our state doesn't need budget gimmicks," he added. "The Democrats need to pass a budget that balances. Period.”
The House's chief budget co-writer, Rep. Ross Hunter, D-Medina, contended that balancing a $37 billion budget — the budget total floated so far by Senate Republicans — would demand gutting non-education programs. "What makes them think we're going to accept the cuts to public services that they propose?" Hunter asked.
It wouldn't be the first time a session has run over. In 2013, lawmakers worked through not one, but two overtime sessions before resolving their budget differences. It wasn't until June 27 — just three days short of a forced government shutdown — that they finally agreed on a plan.
Below, a few of the key points in the Democrats' budget:
A Capital Gains Tax
Democrats have proposed a five percent capital gains tax on individuals earning at least $25,000 from investments or on couples earning at least $50,000 from investments. Most homes, retirement accounts, agriculture and timber would be exempt. According to Rep. Reuven Carlyle, D-Seattle and the House's other chief budget co-writer, the tax would apply to 32,000 of Washington's wealthiest residents. $400 million would be earmarked for education annually. The rest would go into a protected fund to pay for higher education programs.
Republican Sen. Hill argued that a capital gains tax will motivate wealthy people to leave Washington and that the protected fund suggested by Democrats will likely be raided for other non-education purposes.
A B&O Tax Increase
Currently, service businesses such as doctors and lawyers pay a 1.5 percent B&O tax on their gross receipts. The Democrats’ plan would increase that rate to 1.8 percent, but exempt businesses that make less than $100,000 a year. Democrats claim that would exempt about 15,000 current B&O taxpayers in the service category from the new rate hike.
Hill pointed out that the higher tax would be a 20 percent increase for service businesses.
Closing tax breaks
House Democrats want to close seven tax breaks, including an exemption for sales tax on bottled water and an exemption which has protected out-of-state residents from paying Washington sales tax. Closing all seven would raise almost $385 million for 2015-2017. "We're proposing closing seven out of 650 tax exemptions," said Carlyle, adding that Washington has the highest number of tax breaks in the nation.
Paying for McCleary
In 2012, the Washington Supreme Court ruled that the state is not meeting its constitutional duty to fully fund K-3 education, ruling that teacher-student ratios in those grades need to be drastically reduced. This is the so-called McCleary ruling.
So far, the Legislature has underfunded its McCleary obligations and is not on track to complete the task by a 2018-2019 fiscal year deadline. The Supreme Court justices are unhappy and have threatened sanctions if a catch-up funding plan is not in place by the end of this session.
The House Democrats' plan calls for most of the revenue from the capital gains tax, B&O tax increase and seven tax break closures to provide $1.4 billion for the McCleary work in 2015-2017. "I think the court will be fine with this," Hunter said.
Hill thinks the McCleary obligations should be paid with existing money, and not by creating new taxes or by closing old tax breaks. He argued that new taxes should only be explored to fund non-education programs.
Hill mentioned a $750 million figure in discussing how the Republicans would approach McCleary funding in 2015-2017, but did not indicate whether the actual GOP proposal could be higher. A $750 million McCleary appropriation would push the state further behind on its legal obligations, which would attract the ire of the Supreme Court.
In a related matter, Washington voters approved last November Initiative 1351, which calls for drastic reductions in teacher-student ratios in Grades K-12. The estimate to begin tackling that in 2015-2017 is roughly $2 billion. The Democrats want to limit the I-1351 work to Grades K-3 in 2015-2017, meshing that with the McCleary work. Republicans have not shared their approach to I-1351 yet.
Raises for Teachers and State Employees
The Democratic budget proposal includes a long-delayed cost-of-living pay increase for the state teachers as well as a negotiated $583 million package of pay increases for state employees.
Republicans also expect to include a cost-of-living increase for teachers in their budget, Hill said. He was cagier about the state employees' negotiated pay package, "We'll see when we roll it out," said Hill.
Killing the Carbon Tax Proposal
Climate change is Gov. Jay Inslee's pet issue. He had proposed levying a carbon emissions tax on the state's 80 to 130 top polluters with a cap-and-trade program added. The resulting revenue would have paid for McCleary work and gone to transportation projects. The Democrats did not include this plan in their budget.
"It is disappointing that the House did not include revenue from a carbon charge in its budget," Inslee said in a statement. "... I will also keep working on it because putting a charge on polluters is a good way to fight carbon pollution and protect the health of Washingtonians as well as finance education, transportation and other pressing needs."
Carlyle said the carbon tax proposal is a new concept that people need to get used to, but that lawmakers will revisit it in the future. "Putting a cap on carbon is very popular with the public and is a good policy," Carlyle said. In a statewide poll in December, 53 percent of respondents said that they would support a carbon tax if it is offset by tax decreases elsewhere.
On Twitter, Republicans gloated about Inslee's carbon emissions tax proposal not being able to get out of the Democratically-controlled House.