Implementing a capital-gains tax would mean tax breaks for others, Senate Democrats say

In this photo taken April 26, 2017, the Washington State Capitol, also known as the Legislative Building, is seen in Olympia. Senate Democrats unveiled their budget proposal Friday.
In this photo taken April 26, 2017, the Washington State Capitol, also known as the Legislative Building, is seen in Olympia. Senate Democrats unveiled their budget proposal Friday. AP

Senate Democrats on Friday released their proposed two-year operating budget that calls for a new capital-gains tax but does not require one to balance the $52.2 billion spending plan.

“Our tax code is broken, and we’re trying to put forward a thoughtful proposal that will help fix our state’s upside-down tax code,” said Senate Majority Leader Andy Billig, D-Spokane. “Right now, if you are a low-income Washingtonian, you pay 17 percent of your income in taxes. If you are a high-income Washingtonian, you pay 3 percent.”

If there are enough votes to pass it in the Senate, a capital-gains tax would raise an estimated $780 million in the first year. Starting in 2021, those funds would pay for a tax break for low-income families, a tax cut for small businesses, a property tax reduction for more senior citizens and elimination of the sales tax on a number of products, Billig said.

Senate Democrats rolled out their proposed operating budget four days after House Democrats unveiled a plan to spend $52.6 billion over two years starting July 1. On Friday afternoon, House lawmakers began debating their budget bill and were expected to ship it to the Senate. Democrats have majorities in both chambers.

House Democrats said they had the votes for a capital-gains tax. Senate Democrats were more circumspect about its prospects.

The Freedom Foundation, an Olympia-based free-market think tank, vowed to file a legal challenge if the final version of the budget includes a capital-gains tax.

“Graduated taxes on income, including income from capital gains, are clearly forbidden under the Washington state Constitution,” said Freedom Foundation CEO Tom McCabe, in a statement. “That was true last year; it’s true now; and, unless the constitution is amended, it will be true every time it’s tried.”

The capital-gains tax that Senate Democrats outlined Friday would be 8.9 percent on earnings above $250,000 on the sale of high-valued assets such as stocks and bonds by individuals and joint filers. 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.

The proposed “working families” tax credit would benefit about 400,000 households through a sales tax rebate, Billig said. A business-and-occupation tax rate cut would save up to $3,000 a year for an estimated 350,000 businesses that gross less than $2.5 million in revenue annually.

An expansion of the senior property tax reduction would benefit 21,815 more seniors. The state also would eliminate the sales tax on feminine hygiene products, diapers, medical and mobility equipment, and over-the-counter medications.

Billig said it’s unclear if there’s enough support in the Senate to pass a capital-gains tax.

“We’re not sure we have the votes for it. But if we don’t, we’re close, so it’s a viable option,” he said.

Under the House Democratic plan, the capital-gains tax would be 9.9 percent on the sale of high-valued assets such as stocks and bonds that generate earnings for couples of $200,000 and above, and $100,000 and above for single filers.

Revenue from the capital gains tax under the House Democratic plan 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, House Democratic leaders said.

Without counting the additional funds from a capital-gains tax, Senate Democrats are proposing an increase in tax revenue of $518 million over two years.

Their proposed budget calls for raising an additional $421 million through a more progressive real estate excise tax. Currently, property sellers pay the same rate on the sale price, 1.28 percent.

The plan is to lower the rate to 0.75 percent for sales less than $250,000, keep it at 1.28 percent from $250,000 up to $1 million, raise the rate to 2 percent for sales from $1 million up to $5 million, and increase it to 2.5 percent for sales $5 million and higher.

Under the House Democratic plan, 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.

Also, the Senate Democratic plan would convert the non-resident sales tax exemption into a remittance program. Residents of states without a sales tax, such as Oregon, would be able to request sales tax refunds of more than $25 and would be limited to one refund per year.

The proposed budget would eliminate a preferential business and occupation tax rate for re-sellers of prescription drugs and a preferential B&O tax rate for travel agents and tour operators, which Senators said mostly benefits out-of-state and online companies.

In addition, the state would increase the tax on insurance premiums for property, auto, and casualty insurance from 2 per cent to 2.52 percent. That would provide an $125 million per year to pay for wildfire prevention and suppression and other actions to prevent forest fires.

House Democrats have proposed raising the business and occupation tax from 1.5 percent 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.

House Democrats said they would use the increased revenue to expand the Washington College Grant, formerly known as the State Need Grant, among other uses.

To support their proposal, House Democrats distributed an op-ed, published earlier this month in The Seattle Times, by Microsoft’s president and chief legal officer, the president of the University of Washington and the vice chairman of the Washington State Board for Community and Technical Colleges. It called for a “recession-proof” workforce education fund, paid for by an increase in the business and occupation tax.

Sen. John Braun, the Centralia Republican who is the GOP’s ranking member on the budget-writing Ways and Means Committee, said the Legislature is “well-positioned” to approve a budget that would support bi-partisan priorities, including special education and mental-health treatment without any new taxes.

“The tax increases in the proposed Senate budget are still unnecessary, and the spending is higher than necessary, but there is no question it’s much more respectful of taxpayers than the House approach,” Braun said in a written statement.

“I appreciate that the Senate majority’s proposal steered clear of the destructive taxes the House supports — the new capital-gains income tax, the higher tax on services and the property-tax increase tied to lifting the statutory cap on local school levies. However, I remain concerned about the effect of the higher real-estate tax and other tax increases in today’s proposal,” Braun added.

On behavioral health — which combines spending on mental health and substance abuse disorders — the Senate Democrats’ proposed budget would increase spending by $283 million over two years. The House plan calls for an additional $206 million.

Gov. Jay Inslee said last year he wants to move nearly all of the civil patients out of Western State Hospital in Lakewood and Eastern State Hospital near Spokane by 2023.

Sen. David Frockt, D-Seattle, said the operating and capital budgets offered by Senate Democrats would accomplish, or get close, to accomplishing Inslee’s plan.

“I think we’re going to have substantially less civil patients in Western State within that time period. Whether it’s fully no civil patients, I can’t say for sure,” he said.

The bricks-and-mortar budget includes opening two new wards at Western State for patients who are part of a criminal case or who have been found not guilty by reason of insanity, Frockt said.

The operating and capital budgets crafted by Senate Democrats also lay the groundwork to build a new Western State Hospital in Lakewood and a new teaching hospital at the University of Washington that would add more mental health beds as well as train workers to combat a shortage in the field.

Although Democrats from the two chambers are proposing to spend roughly the same amount, Senate Democrats said they were able to balance their plan without the capital-gains tax in part by working with their Republican colleagues to find savings, said Sen. Christine Rolfes, the Bainbridge Island Democrat who is chairwoman of the Senate Ways and Means Committee.

Rolfes said the Senate Democrats’ proposal would add staff in the Health Care Authority to make sure that reimbursements in the Medicaid managed-care system are handled properly.

The differences in the House and Senate budgets will be hashed out by a joint committee, and each chamber then votes on that final version.

The Legislature’s regular session ends April 28.