Politics & Government

Gov. Jay Inslee proposes taxing capital gains

Gov. Jay Inslee wants more money for schools, mental-health treatment, state worker salaries and more in a two-year budget that would spend 15 percent more than the last one.

He wants to finance it mainly with a tax on high income from capital gains and a charge on large emitters of greenhouse gases — two years after he ran for governor on a no-new-taxes pledge.

“I have hoped to avoid this route. I have tried to avoid this route. But we now have an obligation to our children,” he said of his reversal, adding that he had tried to raise revenue by closing tax exemptions but the Legislature has failed to “muster the gusto” to close about $500 million worth of loopholes the past two years.

Inslee did target five tax breaks in his latest plan, while opening or extending eight others worth about one-third of the breaks he would close. He also called for adding 50 cents to the tax on a pack of cigarettes and taxing electronic cigarettes.

Altogether, the plan relies on roughly $1.4 billion in new revenue, $450 million from reserves, $200 million found by moving money around and $200 million in cuts.

“We have slashed to the bone and now we’re looking into the cartilage,” Inslee said, and on mental health, “we’re in the carotid artery.” The state closed wards at its psychiatric hospitals, among many recession-era cuts.

“You may not have noticed them,” he told reporters, “but I’m telling you when I go through the wards and I see these psychiatric patients that are schizophrenic handcuffed to a gurney, sitting in a hallway, that are now we’ve been ordered by a (court) to do something about — their family noticed them.”

The budget would add 180 mental-health beds, including two 30-bed wards at Western State Hospital in Lakewood, to address two court decisions. One ward would take patients now being warehoused in emergency rooms. The other would accept inmates now facing long waits in jail to be evaluated and treated before facing trial.

The biggest court mandate the state faces, though, is to reverse the underfunding of schools and fully fund basic education by 2018. The state Supreme Court has held the state in contempt in that case, known as McCleary.

Inslee wants to give school staff the same raises he has negotiated with state employees — 3 percent next year and 1.8 percent the following year — while beating by a year the Supreme Court’s deadline for fully funding school operating costs, expanding full-day kindergarten statewide and reducing class sizes to 17 students in kindergarten through third grade.

But Inslee said the state doesn’t have enough money to reduce class sizes in every grade as demanded by an initiative voters passed last month. His stance met a rebuke from the state teacher’s union.

Inslee’s budget would expand preschool programs and college scholarships, and freeze college tuition. It also would hire more employees at state parks and in child protective services.

The governor’s plan counts on getting $800 million a year from taxes on the sale of stocks and other capital assets. An estimated 32,000 people who earn more than $25,000 in capital gains in a year, plus married couples who file their taxes jointly and earn $50,000 in capital gains in a year, would pay 7 percent of that income in taxes. Retirement accounts would be exempt, as would most sales of primary homes.

The new tax would reduce income inequality, Inslee said. Washington has one of the nation’s most regressive tax systems because of its reliance on sales taxes and lack of income tax. Inslee said all but nine states tax capital gains.

The Democratic governor’s plan now goes to the Legislature, where power is divided between Democrats who say new revenue is needed and Republicans who are skeptical of tax increases.

“Investing in student achievement and providing essential services should not depend on risky tax schemes that threaten our economy,” Redmond Republican Senate budget chairman Andy Hill said in a statement.

Voters — who rejected an income tax on high earners in 2010 — could have the last word.

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