House Dems propose capital gains and other taxes to fund two-year state spending plan

In this photo taken April 26, 2017, the Washington State Capitol, also known as the Legislative Building, is seen in Olympia. House Democrats unveiled their two-year budget plan Monday.
In this photo taken April 26, 2017, the Washington State Capitol, also known as the Legislative Building, is seen in Olympia. House Democrats unveiled their two-year budget plan Monday. AP

House Democrats on Monday rolled out their proposed two-year state operating budget that includes a capital gains tax, a progressive real estate excise tax and a higher business and occupation tax on firms that rely on well-educated workers.

The package would generate an additional $1.4 billion in the budget that runs from July 1 to June 30, 2021.

Democrats, who control the House, said they have enough votes to approve the additional revenue for the $52.6 billion spending plan that includes increases in several areas, including K-12 education and behavioral health. The overall increase over the current two-year budget is $8 billion.

“We have to balance the wants and needs so that we have prudent fiscal stability, and I believe we have accomplished that balance in the budget proposal,” said House Majority Leader Pat Sullivan, D-Covington.

Gov. Jay Inslee, who released his version of the budget last year that included a capital gains tax that would have affected more taxpayers, said he looks forward to working with the House and Senate on the final version of the budget.

“The plan put forward by House Democrats today would make key investments to improve the state’s behavioral health system, protect our struggling orca and salmon populations, while continuing to provide crucial resources in education from early learning through college, as well as special education,” the Democratic governor said in a written statement.

Rep. Drew Stokesbary, R-Auburn, said despite the state’s $2.8 billion budget surplus, Democrats have “unfortunately chosen to double down” on tax increases.

“We can easily write a budget that funds all of our state priorities without raising any new taxes. This includes fixing the governor’s broken mental health system, addressing the homelessness crisis, improving the K-12 special education funding formula, growing millions of new chinook salmon to feed the orca and even giving raises to state employees,” said Stokesbary, the ranking GOP member on the House Appropriations Committee.

The proposed 9.9 percent capital gains tax would apply to the sale of high-valued assets such as stocks and bonds when they generate profits of $100,000 or more for individuals and $200,000 for couples. It would cover about 0.4 per cent — about 14,000 households — of the state’s taxpayers, said Rep. Gael Tarleton, D-Seattle.

The new tax would not apply to retirement accounts and the sales of single-family residences, duplexes and triplexes; cattle, horses, breeding livestock, agricultural lands or timber and timber lands.

Republicans have said a capital gains tax violates the state Constitution because it’s qualifies as an income tax.

Anticipating a legal challenge, the House Democrats decided to make the capital gains tax take effect on July, 1, 2020, the second year of the two-year budget. It would generate $780 million annually.

“We believe it will pass constitutional muster,” Sullivan said at a press briefing.

“Unfortunately, the post-Great Recession economy has not produced enough revenue to fund our current needs,” Tarleton said, explaining the need for tax increases. “We have an economy that is disconnected to our tax code, and wealth is continuing to concentrate in the hands of fewer and fewer individuals. They pay less and less into the critical public investments that we need in this state.”

Sullivan stressed that revenue from the capital gains tax would go into an account that only can be spent on education. The funds would be targeted to the K-12 system, pre-kindergarten education and special education, he added.

Under the current real estate excise tax, property sellers pay the same rate. Under the House Democratic plan, the flat rate would be replaced with a graduated rate structure. Eighty percent of sales would pay less tax and 18 percent would see no change, House Democrats said.

The current 1.28 percent rate would be reduced to 0.9 percent if the sales price is $500,000 or less. It would remain at 1.28 percent for sales greater than $500,000 and less than or equal to $1.5 million.

The rate would be 2 percent on the portion of the sale over $1.5 million and less than $7 million. The rate would be 3 percent for the portion of the sale at $7 million or more.

The tax proposal is expected to generate an additional $130 million over the two-year budget.

The third major tax change would raise the state business and occupation tax from 1.5 per cent to 1.8 percent for businesses that rely heavily on workers with a post-secondary education, such as software engineers, accountants, doctors and management services.

Four or five large tech companies could have a rate up to 2 percent, and Amazon and Microsoft might pay up to 2.5 percent because of their massive worldwide sales, Tarleton said.

The state expects to collect an additional $427.4 million over two years.

If the House Democratic version is adopted, an additional $248.7 million would be used to expand the Washington College Grant, formerly known as the State Need Grant, said Rep. Drew Hansen, D-Bainbridge Island. The funding would reduce the wait list by half in the 2019-2020 academic year and eliminate it in 2020-2021, according to budget documents.

“We need to invest in those students who will be leading our state and our economy for decades to come,” Tarleton said.

The proposed budget calls for spending an additional $206 million on the state’s behavioral health crisis, including $136 million on operations and safety at the two state psychiatric hospitals — Western State Hospital in Lakewood and Eastern State Hospital near Spokane.

The House Democratic plan calls for adding 530 new full-time positions at the two hospitals.

House Democrats on Monday also released their version of the capital budget bill, with $1 million for pre-design work on a new Western State Hospital that would have 250 to 350 beds, said Rep. Steve Tharinger, the Sequim Democrat who is chairman of the House Capital Budget Committee.

When asked how a smaller Western State could handle the number of criminal patients, Tharinger said the Department of Social and Health Services, which operates the hospital, has studied new facilities in Oregon and Massachusetts and concluded the “optimal size for operation and safety” is between 250 and 350.

Inslee has called for a study on building a new 500-bed Western State.

An additional $91 million would be spent in the upcoming two-year operating budget to expand behavioral health beds and services at sites including private nonprofit hospitals and skilled nursing facilities, so patients can get treatment closer to home, said Rep. Timm Ormsby, the Spokane Democrat who is chairman of the House Appropriations Committee.

The plan calls for spending an additional $76 million to comply with the state’s settlement in the Trueblood lawsuit, said Rep. June Robinson, D-Everett.

In 2015, a federal judge ruled in favor of a class of criminal defendants suffering from mental illness who were held in county jails for months as they waited to be evaluated to determine if they could assist in their defense. Many of the defendants had to wait for weeks or months to get into either Western State Hospital or Eastern State Hospital.

The Senate earlier this month approved a bill to expand the number of offenses for which law enforcement can move a mentally ill person out of the criminal justice system and into treatment, allows courts to consider outpatient competency restoration for misdemeanors and some felonies and creates the job of “forensic navigator” to help criminal defendants with mental health issues find resources so they can recover. The bill is pending in the House.

The state is expected to have $4.5 billion in additional revenue over the next two years under the current taxation system, said Sullivan, the House Majority Leader. But he said nearly the entire amount will be spent on the K-12 system based on the legislature’s bipartisan response in 2017 to the McCleary decision. The state Supreme Court ruled in 2012 that the state had underfunded K-12 schools.

Sullivan said it’s “absolutely not true” when some Republicans and business leaders say the Legislature has $4.5 billion to “spend on new things.”

“That money is being invested for the 1.1 million school kids across this state. We are going to live up to that promise,” he said.

Tarleton, chairwoman of the House Finance Committee, also said Democratic budget writers crafted their proposal to make it as “recession-resistant” as possible, so spending would not have to be cut if there’s a downturn in the economy.

“We are not counting on sales taxes. We are not counting on a huge investments from business and occupation taxes that go up arbitrarily, and then in a recession we have a collapse like we had in 2008,” she said.

Also on Monday, House Democrats released their version of the two-year state transportation budget.

The proposed spending plan includes $14.9 million to avoid a toll-rate increase July 1 on the Tacoma Narrows Bridge, said Rep. Jake Fey, the Tacoma Democrat who is chairman of the House Transportation Committee.

Fey said the transportation budget follows the plan that he successfully urged the Legislature to adopt last year. It calls for providing up to $85 million in loans until the bridge’s debt and state loans are repaid through 2032. With the exception of a toll rate increase up to 25 cents on July 1, 2021 or later, state officials have said said toll rates would not increase.

The capital budget released Monday also includes funding for the planned Washington State Library-Archives Building in Olympia.

The building would be built next to other state office buildings on the south campus. It would allow the Secretary of State’s office to consolidate its operations—currently spread out among six leased facilities—into a single location.

Senate Democrats, who also have a majority in their chamber, are scheduled to release their version of the operating and capital budgets on Friday. The 105-day regular legislative session ends April 28.