Politics & Government

House budget would pay for schools with taxes on capital gains and businesses

The Legislative Building in Olympia is shown on Jan. 3, 2013.
The Legislative Building in Olympia is shown on Jan. 3, 2013. The Olympian

Democrats in the state House released a $44.7-billion spending plan Monday that relies on $3 billion in new revenue over two years, mainly from new taxes on capital gains and tax hikes for some businesses.

The Democrats’ plan would spend about $1.6 billion more than a rival proposal put forth last week by Senate Republicans, who proposed rejecting state worker contracts and making some cuts to social services to balance their budget.

Both sides are working to comply with a 2012 state Supreme Court order to fix the way the state pays for schools.

In the McCleary case, the high court has demanded that the state stop relying on local school district property taxes to pay teachers and other school employees. The court has said lawmakers must have a plan in place to do that by the time they adjourn this year.

While Republican Senate leaders have proposed imposing a new statewide property tax to help shift those costs to the state budget, leaders of the Democrat-controlled House rejected that approach Monday, saying it would cause unacceptable tax increases in high-cost areas such as Seattle and other parts of the Puget Sound.

“I think it’s unfair to say that people that live in the greater Puget Sound are all rich, that they can afford a property tax increase,” said state Rep. Kris Lytton, D-Anacortes, who is the chairwoman of the House Finance Committee.

“What we wanted to do was try to make something that was going to be fair.”

GOP leaders, meanwhile, have said their plan would lower taxes for most people in the state, because it would eliminate local school district levies currently used for maintenance and operations.

On Monday, Republicans criticized the amount of new tax money in the Democratic plan, while saying it would put too little of that revenue toward K-12 schools.

“These taxes are not about K-12. These taxes are about everything but K-12,” said state Sen. John Braun, R-Centralia, the Senate’s lead budget writer.

Both spending plans would put about the same amount of new money into K-12 education in the next two years — about $1.8 billion.

To accomplish that, the House plan would enact a 7 percent tax on capital gains, such as sales of stocks and bonds. Democratic leaders said the new tax would affect about 1.5 percent of Washington’s taxpayers — or about 48,000 people — and bring in about $715 million over two years. Sales of single-family homes and retirement accounts would be exempt from the tax.

An even bigger part of the House plan is a proposal to increase taxes on some of the higher-grossing businesses throughout the state, which would bring in about $1.2 billion in the next two years.

Businesses with a taxable revenue of more than $250,000 would see a 20 percent hike in their business and occupation tax rates under the Democratic budget, although those making between $250,000 and $500,000 would get a $100,000 deduction.

There is one large exception: About 2,300 businesses operating under a preferential tax rate would not see their rates change. That includes mega-businesses such as Boeing, as well as newspapers, tour operators and solar energy manufacturers.

House leaders say most businesses would pay less under their plan, which would exempt companies making less than $250,000 from paying B&O taxes. While 41 percent of businesses don’t have to pay the tax right now, the House plan would exempt about 72 percent of the state’s companies.

Another money-maker for the House Democratic budget would end an exemption for some online sales, which is expected to bring in about $340.8 million in the next two years.

Additionally, the House plan would increase real estate taxes on sales of homes priced at $1 million or more, while lowering taxes for homes priced under $250,000. That change would bring in about $419.7 million over two years.

Unlike the plan from Senate leaders, the House Democrats’ plan would fully fund labor contracts that Gov. Jay Inslee’s office negotiated with 38 employee unions last year. The House budget proposal would spend about $682 million on increased compensation for state workers, including money to extend salary increases to state employees who aren’t part of a labor union.

The contracts as negotiated include cost-of-living raises of about 6 percent for most workers over two years, as well as targeted pay increases for people in certain positions that are hard to fill.

Republicans have proposed rejecting all but three of the negotiated contracts, and instead offer workers flat raises of $500 each of the next two years.

Democrats also would pay more to revamp the state’s mental health system, offering more than $150 million in state money over the next two years to help make major changes at Washington’s two psychiatric hospitals. Republicans proposed about $95 million.

In another key difference, the Democratic plan would freeze tuition at state colleges and universities for the next two years, while the GOP plan would tie tuition increases to growth in the state’s average wage.

House leaders said they plan to vote on the spending portion of their proposal Friday, but don’t have immediate plans to hold a floor vote on the tax measures. They said they wanted to negotiate those behind the scenes, instead of sending tax bills to the Senate only to watch them die.

In response, Republicans questioned whether Democrats have enough votes in the House to support their own tax plan.

“We’re willing to work with them, but they’ve got to show that what they have in mind is politically possible,” Braun said. “To do anything else just says that they aren’t serious about solving the McCleary problem.”

Overall, the House budget would spend significantly less than the $46 billion spending plan Inslee proposed in December.

Democratic Rep. Timm Ormsby of Spokane, the lead House budget writer, referred to House Democrats’ plan as the “high-water mark” and Inslee’s as the “100-year flood level.”

Melissa Santos: 360-357-0209, @melissasantos1