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With Democrats in control, will Inslee finally get his capital gains tax?

It's not the largest addition to the governor's proposed revenue plan, but it's likely to cause the most fuss. 

Washington Governor Jay Inslee announces his clean-energy climate plan during a press conference at the Smart Buildings Center in Seattle on Monday, Dec. 10, 2018. (Photo by Dorothy Edwards/Crosscut)

It’s the vampire of Washington taxes. Remove the stake from its heart, and it rises from the grave again. 

Its the capital gains tax, and Gov. Jay Inslee is proposing it. Again. Pushing for a capital gains tax has been an annual ritual re-enacted by Inslee and House Democrats just about every budget cycle for the past decade. Each year, it has died — usually after a few House Democrats get squeamish, or from opposition in the Senate, which was dominated by Republicans until 2017.

But as the governor pointed out during his Thursday morning unveiling at the Capitol Dome in Olympia, the odds are stacked in his favor. For the 2019 session, Democrats have a significant advantage in both chambers — 28-21 in the Senate and 56-42 in the House — which means they have enough votes to allow a few Democrats to slough off on these tax matters.

“We’ve passed the capital gains tax (in the House) in the past. But it’s way premature to be speculating,” said Rep TImm Ormsby, D-Spokane and chairman of the House Appropriations Committee.

If passed, the proposal would raise $975 million by instituting a 9 percent capital gains tax that would affect the richest 1.5 percent of Washington’s residents.

“Only a small fraction of our wealthiest residents will be involved,” Inslee said.

Sen. John Braun, R-Chehalis and GOP budget leader in the Senate, meanwhile, responded to Inslee’s proposal with a preview of the Republican counterargument. “Inslee is calling for a multibillion-dollar tax increase on employers and the state’s first-ever tax on personal income to finance a $10 billion spending increase,” he said.

Actually, the governor’s budget is merely a document of his priorities — with dollars attached. The real budget proposal conversation doesn’t start until late February or March, when the majority Democratic caucuses in the House and Senate unveil their budget plans. 

With that in mind, the budget math works like this:

The state government already expects roughly $50 billion in revenue for its operational budget to materialize in fiscal 2019-2021. They are also expecting a budget shortfall; 2019 will be the first year that the state is complying with a 2012 state Supreme Court ruling to fully fund basic education. As a result, several billion dollars' worth of education upgrades will be included, bringing  predicted spending up to roughly $54 billion in 2019-2021. The 2017-19 state operations budget, by comparison, was roughly $44 billion. 

Inslee would like for $2.6 billion of that $4 billion shortfall to be filled by increasing the business-and-occupation tax on gross receipts of service business such as attorneys and accountants. The capital gains tax would add almost $1 billion. A series of smaller tax increases elsewhere would take care of the rest.

While the B&O tax adjustment represents the largest net increase, the capital gains tax issue is likely to fuel the largest partisan fights in the 105-day session, which begins Jan. 14.

Republicans hate this tax, arguing that it is a type of income tax. Republicans have argued that a capital gains tax is like a gateway drug to a full-fledged income tax in Washington. Both parties consider supporting income taxes as political suicide in Washington. 

Democrats will likely frame the tax in the same terms as David Schumacher, director of the Washington Office of Financial Management. He said a capital gains tax is a tax on a financial transaction — meaning it is an excise tax.

For years, Olympia observers have believed there is a chance that this definition could end up in litigation if a capital gains tax is passed — meaning a judge would ultimately make the call.

While a 9 percent capital gains tax is larger than any previous proposal, its threshold for kicking in will remain the same as earlier proposals. The tax will apply to stock, bond or similar sales of $25,000 for more for an individual or $50,000 or more for a couple. Schumacher said a family would likely need to earn $660,000 or more to become liable for a capital gains tax. The tax would not be applied to the sale of any homes. 

Inslee described the capital gains tax as a way to change Washington’s place as the most regressive tax state in the nation — meaning the poor pay greater portions of their incomes in taxes than the wealthy do.

“There is an increasing revulsion against the unfairness of our system,” he said. “It’s a choice between a single mother working in a hospital with kids trying to make ends meet or someone making more than $660,000.”

In the past, Republicans have argued that a capital gains tax would hurt a small business owner selling his or her establishment — essentially taking money from that person’s retirement nest egg. Schumacher said that would occur only once, and not annually. “A one-time sale is a one-time tax,” he said. 

Service businesses were selected for the B&O tax increase because they don’t charge their customers sales taxes — so the passed-on-to-customer taxes are currently less in the service industry.

The highest-profile part of Inslee’s proposed budget is more than $1 billion for measures related to orca recovery across the government’s operations, transportation and capital budgets. That means the measures will be split among numerous coffers and numerous revenue sources. 

But the biggest chunk of budget will come from implementing education improvements required by the 2012 McCleary ruling. The capital gains tax is aimed at paying for some of these measures.

“We recognize the need to pay for the McCleary decision. We’ve eaten the meal. Now we have to pay the bill,” Inslee said. 

The governor’s budget also calls for $675 million in increased spending on mental health, the creation of a state broadband office to spread the top-grade internet services to remote parts of the state, combating homelessness and fighting the opioid crisis — plus many other measures.

“The governor’s priorities are spot on," Ormsby said. 

The House’s GOP budget leader, Rep. Bruce Chandler, R-Granger, disagreed. “Under the governor's proposed budget, state spending will have increased 75 percent over eight years,” he said. “This is unnecessary, unsustainable, unrealistic and unfair to the taxpayers of this state. Despite record revenue collections, the governor says we need to raise taxes. … He also wants a capital gains income tax, which is very likely unconstitutional and will most likely lead to a state income tax, something voters have rejected time and time again.

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With Democrats in control, will Inslee finally get his capital gains tax?