Capital gains tax close to dead

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Pat Sullivan

A proposed capital gains tax is more or less off the table in the Washington Legislature’s deadlocked 2015-2017 budget talks. In its place, Democrats are seeking to close some yet-to-be-announced tax breaks.

Republican leaders said they might consider closing some tax breaks if there are no major economic ripple effects. That is a move from previous GOP positions that all tax breaks should remain intact. However, Republican leaders stopped short Friday of saying they would definitely agree to closing some tax exemptions.

On Friday, Gov. Jay Inslee plus Democratic and Republican legislative leaders held press conferences to discuss the sluggish budget talks. Looming ahead is the fact that without a 2015-2017 budget signed into law by June 30, the state government will partly shut down on July 1.

On Friday, the legislative Democrats’ outlooks on making the deadline were grim, but they contended it is doable. Republicans felt optimistic about meeting the June 30 deadline. Somewhere between $200 million and $350 million separate the two sides in proposed spending, depending on how the math is calculated.

“When you look at the numbers, we’re looking at a fraction of a percentage of the budget,” said House Minority Leader Dan Kristiansen, R-Snohomish.

Gov. Inslee said, “It’s a small gap in party positions when measured in dollars. But the negotiations are about more than dollars.” He said the two sides have several different priorities on how the money is spent.

“I’m somewhat worried" about a shutdown, said House Majority Leader Pat Sullivan, D-Covington.

Meanwhile, the fates of a $15 billion, 16-year transportation projects package and the 2015-2017 capital projects budget are in limbo.

Recently, the House Democrats instructed their transportation and capital projects negotiators to halt those talks until a main budget agreement is nailed down. Their rationale was that the main budget, the capital budget and the long-range transportation package have too many interlocking parts that can be resolved only by nailing down the main budget first. The GOP disagrees.

On Saturday, there will be 10 days left to sign a main budget into law, essentially leaving no more than seven days for negotiations in order to meet that deadline. Unless the Legislature works extra-long hours, it would likely take three days after an agreement to jump through all the legislative hoops before Inslee could sign a budget.

That opens up a scenario in which the negotiations on the capital projects budget and the transportation package might not begin again until only two or three days are left in June. And leaders on both sides says they are very close to agreements on both, except for a Republican stance that $700 million in transit money be automatically rerouted to roads if Inslee installs some low-carbon fuel standards on vehicles.

The wrinkle is that the $15 billion transportation projects package and the capital projects budget do not have June 30 deadlines attached to them. Conceivably, the legislators could stick around for a few days in July to pass those packages if needed. But on Friday, leaders on both sides were noncommittal on whether they would be willing to do so.

Democrats began the general fund budget negotiations two and a half months ago with a $38.8 billion spending package, including $1.5 billion in new revenues coming from a capital gains tax, an increase on one of the state's business-and-occupation taxes, and closing seven tax breaks worth $385 million per biennium. Republicans initially proposed a $37.9 billion spending plan with no new revenue sources. “No new revenue” has been the GOP’s cardinal position during the talks.

Since early April, the state has learned it can expect an extra $482 million in unanticipated revenue in 2015-2017. And the Democrats took their B&O tax increase and the proposed closures of seven tax breaks off the table. Now the Democrats have offered to take the capital gains tax proposal off the table if it can be replaced by closing some tax breaks.

Democrats declined to say what their latest tax-break closures offer is. But they indicated some likely candidates.

These include removing a recycled fuel exemption originally intended for sawmills that was later assumed by Washington’s five oil refineries. Ending the exemption would translate into $51 million in additional revenue for the upcoming biennium. Other possible exemptions for closure might include breaks on sales taxes for non-residents, which would raise $52 million in the upcoming biennium, and for bottled water, which would raise $44 million.

The budget math gets fuzzy and contradictory when mapping out the current proposed spending levels and which side has moved more.

After starting at the $38.8 billion level, which needed $1.5 billion in new revenue to achieve, the Democrats’ now propose $38.2 billon in spending, which needs $300 million to $350 million in extra revenue to achieve, according to Democratic figures. The GOP’s original $37.9 billion spending proposal has climbed by a few dozen million dollars to almost hit $38 billion, according to a Democratic budget sheet.

Republicans did not provide their own figures on Friday. But they disputed Inslee and the Democratic legislative leaders’ contention that the Democrats have done most of the moving toward a compromise in the talks. The Republicans argued Friday that the Democrats started with a much-too-high figure of needed revenue, which artificially inflates the amount of Democratic movement toward a compromise.

The Republicans want to use some money from state funds not normally earmarked for the main budget — a move that the Democrats have opposed. Budget negotiator Sen. Andy Hill, R-Redmond, characterized those shifts as permanent moves and not as borrowing money to be repaid later.

Other disputes in the 2015-2017 budget talks also remain.

One is the Republicans want to cut state college tuition by 25 percent, which would require $354 million to implement. Democrats began by wanting to keep tuition steady, but appear now to be considering a tuition cut much smaller than 25 percent as compromise.

Another dispute is on revamping Washington’s recreational marijuana tax from its current set-up of 25 percent when a grower sells to a processor, 25 percent when a processor sells to a retailer, and 25 percent when a retailer sells to a customer. The Republicans originally wanted to reduce that to a sole tax of 37 percent for a customer buying from a retailer. The Democrats proposed a similar change, but originally wanted a 30 percent tax at the retailer-customer level. Sullivan indicated the two sides might be close on a percentage.

But Sullivan added the Democrats still want the bulk of that tax money to go to health-oriented purposes as designated in Initiative 502, which legalized recreational marijuana, while Republicans want the bulk of the money to go instead to the general fund.

Also, the two sides have not agreed on how to deal with the 2014 passage of Initiative 1351, which ordered dramatic reductions in the teacher-student ratio in Grades 4-12. Such a move would cost $2 billion per biennium, which is currently not in the state’s coffers.

Republicans want to sent I-1351 back to voters in November for a new ballot, gambling it would be rejected on a second try. Democrats want the House and Senate to collect the two-thirds votes necessary in each chamber to nullify I-1351, arguing that is less of a gamble.

Inslee said that dispute is still unresolved.


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About the Authors & Contributors

John Stang

John Stang

John Stang is a freelance writer who often covers state government and the environment. He can be reached on email at and on Twitter at @johnstang_8