Politics & Government

House budget replaces property taxes with capital-gains tax, delays teacher salary fix

House Majority Leader Pat Sullivan, second from left, D-Covington, talks about the House Democrats’ proposed supplemental budget on Tuesday as he sits with Rep. Kristine Lytton, left, D-Anacortes, Rep. Timm Ormsby, second from right, D-Spokane, and Rep. June Robinson, right, D-Everett, during a news conference at the Capitol in Olympia, Wash. The budget proposal sticks to an education funding time line that the state Supreme Court has previously rejected and also includes a capital-gains tax for long-term property tax relief.
House Majority Leader Pat Sullivan, second from left, D-Covington, talks about the House Democrats’ proposed supplemental budget on Tuesday as he sits with Rep. Kristine Lytton, left, D-Anacortes, Rep. Timm Ormsby, second from right, D-Spokane, and Rep. June Robinson, right, D-Everett, during a news conference at the Capitol in Olympia, Wash. The budget proposal sticks to an education funding time line that the state Supreme Court has previously rejected and also includes a capital-gains tax for long-term property tax relief. AP

Democrats in the state House released a 2018 supplemental budget proposal Tuesday that would ignore a court order to speed up reform of how K-12 teachers are paid and would cut property taxes in 2019 and 2020 using a surge of unexpected cash reserves.

The budget plan would reduce property taxes even further starting in 2021 but would replace the lost revenue with a tax on capital gains — money made on the sale of stocks, bonds and other financial assets.

The proposal reveals big differences between how House and Senate leaders hope to tweak the two-year budget approved in 2017 before the 60-day session ends on March 8.

The House tax swap is a departure from short-term property-tax cuts proposed recently by Senate Democrats and Republicans in the Legislature.

Unlike the House, the Senate’s budget plan booked the roughly $1 billion necessary to expedite the state’s fix for teacher salaries by the 2018 school year. The Washington Supreme Court had ordered the state to take on the full cost of teacher salaries paid for in part by local levies.

The Legislature in 2017 approved a plan to do so, but it won’t be completely phased in until 2019 — one year late.

House Majority Leader Pat Sullivan, D-Covington, told reporters Tuesday that speeding up the salary overhaul could strain school districts already implementing large changes. Sullivan said the phase-in was set up to prepare schools for complex reform.

He said the state would be better off paying for other education priorities. The House budget plan spends an extra $36.8 million on special education, among other investments.

“Our focus has really been on the school kids,” Sullivan said.

Overall, the supplemental budget proposal would increase spending over the $43.7 billion two-year budget approved in 2017 by $377 million and put money toward schools, the mental health system and more.

If implemented, the House budget could lead to a standoff with the Supreme Court. The state is currently being fined $100,000 per day over the Legislature’s failure to complete its overhaul of the school system.

Justices have also threatened further sanctions for not complying with deadlines.

But Sullivan — and many in the GOP — have said keeping the existing salary phase-in is worth the risk.

Sen. John Braun, R-Centralia, echoed Sullivan on Tuesday, telling reporters that state money can be spent in more effective ways than speeding up an overhaul of teacher salaries.

“I think we would be much better off investing in special education and transportation and places we can see real impact in student success,” he said.

Braun was the top budget writer for Republicans in the Senate in 2017 when the schools plan was approved.

The House budget did draw some push-back from some education advocates, including the statewide teachers union.

“Washington students should not be asked to wait yet another year for the state to fulfill its constitutional obligation to fund their education,” said Washington Education Association President Kim Mead, in an emailed statement.

The 2017 schools plan included $7.3 billion in new state spending on education over four years, bankrolled by an 81-cent increase in state property taxes. An accompanying cut in local property tax levies won’t come into effect until 2019, however, leading to a spike in taxes this year.

Leaders from both parties are trying to soften that blow after a recent revenue projection showing a strong economy boosting state tax collections by $1.3 billion more than expected through 2021.

Under the House plan, the state would use $995 million from the so-called “rainy-day” fund to drop the tax rate about 34 cents per $1,000 in assessed value in 2019 and an additional 6 cents in 2020. The rainy-day fund typically needs approval from 60 percent of the Legislature to access.

The Senate Democratic budget plan also would tap the rainy day fund to cut property taxes, but only by 31 cents in 2019. The rates would rise in 2020, although Democrats said they are looking into whether the cut could be extended.

Republicans have argued the state should implement a deeper short-term property tax cut.

One GOP tax plan proposed by state Sen. Doug Ericksen, R-Ferndale, would allow taxpayers to defer the 81-cent increase on the 2018 tax bill while later reducing the state’s property-tax levy for schools by 81 cents in 2019.

Only House Democrats have proposed reaching beyond 2020 to cut property taxes.

Their budget would start collecting money from the capital-gains tax in 2020, and Democrats project they would cut the state’s property taxes starting in 2021 with the goal of reducing the rate to $2.20 per $1,000 in assessed value from its current level of $2.70.

House leaders said Tuesday taxing capital gains is necessary to offer lasting relief for a swath of residents hit harder by property taxes, such as the elderly.

House leaders estimated that 50,000 people would be subject to the tax annually.

“I fear that people will lose their homes over what we did,” state Rep. Kris Lytton, D-Anacortes, told reporters Tuesday. Lytton chairs the House Finance Committee. “The 48,000 that are going to pay the excise tax on capital gains, I don’t believe any of them will lose their homes over this.”

The House’s plan would tax capital gains at a 7 percent rate.

That comes with limitations. Only people who report more than $25,000 in capital gains — $50,000 for couples — on their federal taxes would be subject to the tax.

The proposal would exempt retirement accounts, and the sale of single-family homes, farm land and much livestock.

A capital-gains tax has already drawn opposition from Republicans. The GOP has criticized capital gains taxes as too susceptible to sharp downturns when the economy is bad and a step toward a broader tax on personal income.

Braun said he would prefer “targeted tax relief” for certain property owners as a way to make Washington’s tax system less regressive without implementing new taxes.

“I strongly disagree with the House’s plan to raise taxes when the state just received the largest revenue forecast increase in a decade,” Braun said in a later statement emailed to reporters.

Republicans also have questioned whether a capital gains tax is constitutional.

The state Supreme Court previously has ruled as illegal income taxes that charge different people different rates.

Democrats insist the capital gains plan is a permissible excise tax. The Internal Revenue Service says excise taxes are “taxes paid when purchases are made on a specific good.”

One of the most common excise taxes is the gas tax.

The House has proposed using a capital-gains tax to bring in cash for the state in previous years, including 2017. But the efforts have been squashed by the Republican-led Senate.

Even though Democrats now control the chamber by a one-vote margin after winning a special election in 2017, the tax plan could still be dead on arrival in the state Senate.

Key Senate leaders have been skeptical as to whether a capital-gains tax has enough support to pass.

Rep. Timm Ormsby, D-Spokane, acknowledged the gap between the House and Senate budget plans Tuesday. Ormsby said negotiations would lead to a unified proposal soon that could pass the Legislature.

“While there are differences, we expect to be able to resolve those quickly in the upcoming two weeks and to get out on time,” Ormsby said.

Walker Orenstein: 360-786-1826, @walkerorenstein

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