Politics & Government

State House Democrats want to tax capital gains, service businesses

State House Democrats are proposing to boost funding for education and social services with $1.5 billion in new taxes.

The House budget proposal released Friday would enact a new tax on capital gains, increase taxes on service businesses and end several tax breaks.

House leaders said their $38.8 billion spending plan, a nearly 13 percent increase over the last two-year budget, would meet key requirements of the state Supreme Court’s McCleary decision that ordered the Legislature to fully fund basic education in Washington by 2018.

“If the court wants a plan, this is a plan. A funded plan,” House Appropriations Committee Chairman Ross Hunter, D-Medina, told reporters.

The House budget proposal would put about $1.4 billion toward McCleary obligations, including lowering class sizes in kindergarten through third grade, paying for school materials and operating costs, and fully funding all-day kindergarten throughout the state.

House leaders didn’t follow fellow Democratic Gov. Jay Inslee’s advice to combat climate change as part of a budget solution by charging the state’s largest emitters of greenhouse gases. They expressed support for such a strategy but said they didn’t want to bank on it in their budget.

But like Inslee, House leaders said their budget would go a long way toward fixing what they described as an unfair tax structure in the state that overburdens the poor.

The House budget proposes enacting a 5 percent tax on most capital gains above $50,000 for couples and $25,000 for individuals. That’s lower than the similar 7 percent tax on sales of stocks, bonds and investment properties proposed by Inslee. The tax — which would exempt most sales of primary residences and retirement funds — would raise about $570 million a year, starting in the second year of the 2015-17 budget cycle.

“This is for the super-wealthy,” House Finance Committee Chairman Reuven Carlyle, D-Seattle, said. “This is asking them to contribute a very modest additional amount to help reinvest in 1 million elementary, middle and high school kids.”

Another major source of revenue in the House budget comes from increasing the business and occupation tax on services businesses such as doctors, lawyers and architects. An increase of 0.3 percentage points in the tax rates for those businesses would generate $532 million in new revenue in the next two years.

But Democrats insisted some small businesses would actually pay less under their proposal, which enlarges a tax credit to eliminate B&O taxes for an extra 15,000 businesses.

House Democrats also set their sights on ending seven tax breaks. Their budget would repeal a sales tax exemption on bottled water, limit sales tax breaks for Oregon residents who purchase small items in Washington, and get rid of tax breaks for travel agents, tour operators and resellers of prescription drugs, among others. Together, those tax adjustments would raise $384 million.

The budget adds more than $90 million to a state mental-health system that is struggling to keep patients out of emergency rooms and jails. It would fund added beds at Western State Hospital and a recent raise for psychiatrists there as well as outpatient treatment that aims to keep patients out of such facilities.

Another large part of the House budget — about $863 million in state general fund money — would pay for raises and benefit increases for teachers and state workers. State workers would receive a 3 percent raise in the first year of the state budget and 1.8 percent in the next, following labor contracts already negotiated between public employee unions and the state. Teachers would receive the same increase.

The House’s strategy hinges on modifying the class-size initiative voters passed last fall as well as using money that otherwise would be transferred to the state’s rainy-day fund. Both of those moves would need supermajority support, which Democratic leaders acknowledge doesn’t yet exist in the House.

The plan wouldn’t entirely ignore Initiative 1351, since it would shrink class sizes in lower grades as part of complying with the McCleary decision.

Republican leaders immediately criticized the House budget proposal for its reliance on new tax revenue — particularly the capital gains tax, which Senate budget writer Andy Hill said was too volatile to be used to fund the state’s education obligations.

Hill, R-Redmond, said he thinks the state can find savings throughout the budget that could pay for the Supreme Court’s McCleary mandate.

“From our point of view, taxes should really be the last resort,” Hill said.

Senate Republicans are expected to release their budget proposal as early as next week.