Gov. Jay Inslee’s carbon tax proposal is dead for this year. But state Democrats’ capital gains tax plan is still in play in the Washington Legislature.
The House Democrats unveiled their latest 2015-2017 budget proposal to the Senate Republicans on Monday — a package that drops several previously proposed revenue hikes. Those include an emissions tax on polluters that Inslee had badly wanted, an increase in some business-and-occupation taxes and the closure of several tax breaks.
However, a tax of 5 percent on individuals making at least $25,000 in a year in capital gains and on couples making at least $50,000 a year in capital gains is still in the House Democrats’ proposed budget. Gains from primary homes, retirement funds and most agricultural and timber capital gains profits would be exempt. It is estimated that 32,000 Washingtonians would pay a capital gains tax.
“We believe that a modest capital gains tax is the right way to move forward,” said House Majority Leader Pat Sullivan, D-Covington. The Senate Republicans have strongly opposed any new taxes, including a capital gains tax.
The appropriate Republican senators could not be reached for comment on Monday.
The House Democrats' dropping of a carbon emissions tax on Washington's biggest polluters essentially kills the idea for this session. Such a tax could have been Inslee’s biggest political victory as an environmentalist governor.
Inslee wanted to use a carbon tax to encourage polluters to trim their greenhouse gas emissions while funneling the revenue to education improvements. Inslee spokeswoman Jaime Smith declined to comment on specifics of the latest Democratic proposal, but added that the governor still hopes to enact some measures to fight climate change.
With a 51-to-47 advantage in the House, the Democrats have the votes lined up to pass the capital gains tax, while apparently failing to pull together the minimum of 50 votes needed to pass a carbon emissions tax.
In broad strokes, the House Democrats shrank their proposed spending from $38.8 billion to $38.4 billion for 2015-17, while the Senate Republican latest proposal is slightly less than $38 billion. A major factor in the two sides moving closer together is that state economists recently predicted $482 million more in revenue than expected for 2015-2017.
If the two sides cannot resolve their differences by June 30, the state government will partially shut down on July 1.
“We made a big move in reducing the amount of [new] revenue," said Rep. Ross Hunter, D-Medina and a House budget negotiator. The House Democrats had proposed creating a capital gains tax, closing some tax breaks and increasing a specific B&O tax to raise $1.5 billion in new revenues. Monday’s proposal dropped the new revenue figure to $550 million, solely coming from a capital gains tax.
Bigger sticking points than the raw amounts of money come from the fact that the two sides’ budget proposals are structured in significantly different ways. Hunter estimated that the two sides are actually about $700 million apart when those structural differences are factored in.
A couple of structural differences are that the Republicans’ plan has $65 million in unidentified cuts that the Democrat want identified, plus a clash on how much the state’s Public Works Account should contribute to the main state budget. The Public Works Account exists outside of the main budget and helps local governments pay for capital projects, such as sewage and water treatment plants. The Republicans originally wanted to take $200 million from that account to balance the main 2015-2017 budget, but reduced that sum to $100 million last week. The Democrats don’t want any of that account to be used for the main budget.
On Monday, House Democratic leaders also said several appropriations-related differences still exist. These include their desire to spend more than Republicans on teacher cost-of-living pay increases, early learning programs, health care, mental health and social services.
Hunter said the Republicans want to trim $60 million to $70 million in social services. Republicans want to spend more on higher education, specifically aiming to cut state college tuition by 25 percent, while Democrats want to keep tuition the same.
Another unresolved issue is that Republicans have offered to move $75 million toward the Democratic position to fully fund $583 million in negotiated salary increases for state employees — if Democrats agree to make state collective bargaining talks public and to put a legal limit on future state employees’ raises. In addition, the two sides have differences over Initiative 1351, which would reduce school class sizes at all grades, and how to comply a 2012 Washington Supreme Court ruling that teacher-student ratios in Grades K-3 must be significantly reduced.
But this month’s biggest budgetary battle will be the capital gains tax.
Republicans have criticized a capital gains tax as discouraging people from moving to Washington and as a threat to small businesses people selling their ventures to retire. And they have said a capital gains tax is being erratic on the amount of revenue it raises from year to year.
Rep. Reuven Carlyle, D-Seattle and another budget negotiator, said the year-by-year fluctuations in a capital gains tax would be handled by allocating a steady $400 million per biennium for K-12 education with the fluctuating remainder going to higher education. He noted that Washington is one of nine states without a capital gains tax.
After Monday’s Democratic press conference, Bothell businessperson Steven Rubenstein said that, under the proposal, he and his wife would eventually pay a significant capital gains tax when they exercise some stock option. He declined to elaborate on the dollar figures but said a 5 percent capital gains tax wouldn’t make them noticeably poorer. “It doesn’t change our lifestyle,” Rubenstein said.
Hunter said passing a main budget by mid-June is possible if the two sides make significant additional progress this week toward a compromise.
A couple of huge loose ends will remain after the two sides agree on a main budget. The state’s long-range transportation projects package and 2015-2017 capital projects budgets are interlocked with the main budget. So some negotiations on those two cannot be compete until it is pinned down on which money goes to which budget.
The capital projects budget should be relatively easy to lock in. However, while Democrats and Republicans agree on major portions of a proposed $15.1 billion, 16-year transportation package with a 11.7-cents-per-gallon gas tax hike, they still have noticeable differences.
These include a Republican plan to transfer sales tax revenue on the state’s transportation-related construction projects from the state’s general fund to a transportation-related fund. That’s roughly $1 billion over the 16-year lifespan of the entire transportation package. Also, Republicans put in a so-called “poison pill” in the transportation package in which $700 million in transit money would be automatically switched to road projects if Inslee installs low-carbon fuel standards for vehicles.
So the bottom line is that the Legislature's current second special session might continue beyond agreements on the main budget in order to resolve the transportation package issues.