“This is the cleverest campaign for an income tax ever mounted in this state. Advocates for bigger government have created the illusion of a crisis in the public schools that only mountains of money can fix. Through a lawsuit they’ve gotten the state Supreme Court on their side. They would force taxes that dig deeper into everyone’s pockets, slam the brakes on economic growth, and redistribute more of the people’s hard-earned income to state agencies and powerful special-interest groups. Ultimately the goal is an income tax. Yet supporters are bending over backward to avoid using that term – and who can blame them?”
“Over the last 80 years this state has seen has seen considerable political agitation for an income tax. This effort comes from those with the most to gain – the unions representing state employees and teachers, social-service advocates and others. But every time an income tax has been put to the people since 1934, they have said no, in the loudest possible terms. The Supreme Court’s intrusion into the school-funding debate appears part of a well-calculated strategy to back the state into a corner and force it to adopt an income tax, whether it wants one or not.”
“Advocates of a state income tax have finally realized they will never win if they put the question to the people in an honest way. So they have set up the phoniest debate since America was forced to choose between “tastes great” and “less filling.” If you listen to the proponents, our big argument for 2017 is about levy equalization and model-school formulas — magic words that have the effect of putting an entire state to sleep. But really it is the same old argument we’ve been having in Washington more than 80 years. Our big debate isn’t about education. It’s about the income tax.”
Whether a capital gains income tax is constitutional is one issue; whether it would end with that is another. Capital gains income tax revenue is highly volatile, as are other taxes aimed at the wealthy. When the economy goes into a downturn, lawmakers will be left to scramble for new sources of money, as has been seen in other states. A broader income tax likely would not be far behind.
The experiences of California and Connecticut demonstrate the point. The severe downturn of 2008-2009 was especially difficult for California, where capital gains rates are highest in the nation and income tax brackets are skewed heavily toward the rich. Tax collections fell dramatically, and the state was forced to compensate by raising taxes on the middle class. A newly disclosed half-billion-dollar deficit in Connecticut is directly related to its capital gains income taxes — and lawmakers there already are talking about imposing higher income taxes on the general population.
At a news conference May 13, 2016, California Gov. Jerry Brown explains that reliance on unpredictable capital gains taxes has created major problems for his state.
“Next year’s deficit has ballooned to $2.2 billion. It’s happening because the state of Connecticut depends too much on its wealthy residents, and wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington. …It now looks like expected revenue from the final income [tax] filing will be a whopping $450 million less than expected.”
“Personal income tax revenues were down $450 million from projections. More specifically, a majority of the decline in income tax receipts is from the withholding and finals portion of the tax. which is tied to capital gains and investment income. That part ended up being down 8.9 percent.”
Connecticut’s Democrat-controlled legislature is now looking for ways to replace the lost revenue. One likely option — increases in the income taxes paid by the middle class. ” ‘As the hole in the budget grows, the options become more limited,’ [House Speaker Joe] Aresimowicz said. With that in mind, the speaker added, he couldn’t rule out income tax hikes on the wealthy or on the middle class at this point.”
“The state Supreme Court has ruled in the past that income taxes are a form of property taxes — which must be applied at a flat rate under the constitution. The capital gains tax measure isn’t uniform because higher earners pay more, Republicans say.”
“Large swings in capital gains are not uncommon, making them a particularly risky tax base. Nationwide, they are the single largest culprit behind state revenue forecasting errors. Relying on such a volatile revenue source to boost educational expenditures is risky. A revenue stream that can decline this rapidly is not one that can be relied upon to support meaningful long-term investments in public education.”
Posting notes that simplistic fiscal estimates from the Washington Department of Revenue make no mention of the fact that tax collections would plummet in the next downturn. “There is little one can say with confidence about capital gains tax revenue. The only thing we can be reasonably sure of is that it won’t look anything like this.”
An exhaustive survey by Jason Mercier of the Washington Policy Center reveals that no other state has a standalone tax on capital gains income – all states that tax capital gains income do so as a component of their state income taxes. None attempt to conceal the purpose by calling it an “excise tax.”
An editorial in the Los Angeles Daily News observes that heavy reliance on high-earner taxes has created major problems for California. “The [California Legislative Analyst Office] notes that revenues from the personal income tax amount to about 70 percent of the General Fund, and that revenue source is highly dependent on capital gains. …That means California’s state revenue is overly dependent on high tech, and any sizable correction in that sector — even absent a general recession — will send state government tumbling into deficit spending again.”
Advocates of an income tax last year managed to collect signatures to place one proposal on the ballot in the city of Olympia. When voters rejected the idea, they took their campaign to the city of Seattle — where the council voted May 1 to direct staff to come up with a detailed proposal. Though a municipal income tax is certain to face a legal challenge, advocates make no secret of the fact that their plan is to put the issue before the state Supreme Court, which they hope will overturn its 1933 ruling declaring an income tax to be unconstitutional.
“Proponents of Seattle’s enacting an income tax say today’s state Supreme Court could interpret the constitution differently, and the city may attempt to sidestep the 1984 law [prohibiting municipal income taxes] by taxing a type of income other than net income.”
Describing proposals for a Seattle income tax: “The [Trump Proof Seattle] coalition says a Seattle income tax would almost certainly be challenged in court and could serve as a legal test case with statewide implications.”
Regarding last year’s unsuccessful income-tax ballot measure in the city of Olympia: “…The measure, which would levy an income tax on Olympia residents whose household income exceeds $200,000, is likely to end up in the courts if it passes. A legal challenge could give the state Supreme Court a chance to reverse its 1930s decisions that struck down graduated state income taxes as unconstitutional.”
Proposals for an income tax — even in the form of a narrowly based tax on capital gains income — are prompting dismay among those who recognize Washington’s unique economy is built around its unique tax structure. Consequences could be dramatic.
“…We should be thankful for the choices Washingtonians have made in the past around defeating an income tax. With our state’s balanced tax system, state revenues have increased almost every year. History shows that our smart growth and consumption-orientated tax system, when combined with intelligent prioritization by legislators, keep Washington at the forefront of bold business initiatives, technical innovation and job creation. The result is not only rising revenues for the state, public schools and local governments, but the fostering of new ideas and opportunities that make the world a better place for everyone.”
“Even after citizens voted nine times against an income tax, some politicians just won’t let it go. The state will get an estimated $3 billion more in revenue from existing tax for the upcoming biennium — isn’t it time they lived within those means?”
Memo notes the extreme volatility problems associated with a capital gains income tax, and points out that California voters recently adopted a constitutional amendment requiring the state to bank much of its capital gains revenue, to prevent future shortfalls from becoming worse. It continues, “If enacted, the capital gains income tax would certainly face legal challenges for being an unconstitutional tax on income. The bill proposes a rate of 7.9%, far above the uniform 1% limit required by the constitution. It is noteworthy that none of the states without an income tax have a capital gains tax. This is likely due to the fact capital gains are considered to be income. There is also the risk that adoption of a capital gains income tax could be used in attempt to create a test case to get today’s state Supreme Court to overturn the state’s well-established 84-year-old income tax ban.”
Briefing paper provides an extensive summary of Democratic proposals in the House and Senate for a capital gains income tax. It observes that in some cases, the Democratic proposals would force the most onerous capital gains taxes in the country. And it notes their effort to describe this income tax as an “excise tax” raises the danger that a Washington tax would not be deductible on federal income tax returns. “By describing the taxes as excise taxes, the two proposals are trying to dance a narrow line drawn in two 1933 cases by the Washington Supreme Court. …If the IRS holds the Washington capital gains tax to be an excise tax on the transfer of property rather than an income tax, it will not be deductible.”
By Laudan Espinoza | Published on February 10, 2017
It obviously has not been easy for lawmakers to come up with legislation that fixes the constitutional issue about school levies raised in the McCleary ruling, treats students and taxpayers in 295 diverse districts equitably and responds to long-standing compensation concerns from teachers and district officials. If it was, the Education Equality Act passed by the Senate more than a week ago wouldn’t still be all by itself on the negotiating table.
Fortunately, another Supreme Court decision looming over our state – the Hirst ruling, from October – is easier to fix than McCleary. There’s no good reason why we can’t have an agreement in place as soon as the end of February.
To put it simply, Hirst complicates the process of permitting a residential water well, and complications mean more cost – tens of thousands of dollars more, potentially, which discourages people from buying land, and property owners from building or selling. Besides derailing the dreams of families all around our state, the ruling means less activity for local lenders and the real-estate and construction sectors.
I remember how a dozen years ago, without warning, the real-estate and construction sectors got hot and began pouring money into the state treasury. In contrast, there’s been ample warning about the chilling effect Hirst is having in those areas of our economy, and what it means for state revenues.
Our children are still being schooled while work on McCleary proceeds, and whatever agreement we reach won’t have an effect on the current school year anyway. Hirst is different, because fewer homes are being built and fewer property transactions are occurring while the Legislature works on a response. The economic damage has already begun, especially in rural Washington.
I know of two bills in each legislative chamber that would address Hirst. One House bill and one Senate bill have bipartisan sponsorship – and in my opinion, represent the straighter path to a solution. The bipartisan Senate bill has already won committee support, while the House committee may push both of its measures ahead.
Not many issues hit all 39 counties in the gut the way Hirst has, and a legislative fix could start bringing relief immediately. It could, and should, be the first major bill to come out of this session.
By Laudan Espinoza | Published on January 31, 2017
Education Equality Act would make student-centered, teacher-friendly reforms
Senate Majority Coalition Caucus members today introduced landmark reforms that would return state government to the role of primary provider for Washington’s K-12 schools while finally connecting school funding with the actual cost of educating students.
The MCC’s Education Equality Act is the first complete, ready-for-voting solution proposed by lawmakers since the state Supreme Court ruling in McCleary v. Washington. The 2012 ruling highlighted what was already known: decades of putting other services ahead of schools caused Washington’s 295 school districts to rely too much on local property tax-levy money to cover costs that should be the state’s responsibility. The Legislature has until April 1 to agree on a new funding approach that takes effect before 2018.
Sen. John Braun, as chair of the Senate Ways and Means Committee, is the Senate budget leader, and was one of the MCC members to serve recently on a bipartisan Joint Education Funding Task Force. That group managed to obtain educator-compensation information that was denied to lawmakers for more than a year, and was one of the final pieces needed to complete the MCC plan.
Braun said the Education Equality Act would not only result in full state-level funding of public schools but also address factors that have made the K-12 system inequitable for students, teachers and taxpayers.
“Our plan is student-centered and teacher-friendly. It’s based on fair and transparent funding and promotes local control and accountability. By any credible measure, this is a progressive approach that should eliminate the educational-opportunity gap, and the associated social injustices, caused by inconsistent district-level funding,” said Braun, R-Centralia.
“It also responds to concerns teachers have about compensation, and the concerns districts have about hiring as well as the so-called ‘levy cliff.’ These issues are outside of the Legislature’s constitutional mandate but are part of the larger picture, so it makes sense to include them in our set of reforms,” he added.
Under the MCC plan, legislators set a statewide per-student funding level that puts Washington in the upper ranks nationally; require each school district to levy the same local property-tax rate and put that revenue toward the per-student amount; and allocate state funds to cover the difference between the per-student standard and the local funding.
The per-student funding level would be higher, and the state’s contribution would increase accordingly, to cover additional services for children who have special needs, or are homeless, or are not native English speakers.
The benefits of the Education Equality Act, Braun explained, include a consistent state investment in each Washington student regardless of ZIP Code, and an end to wild swings in local school-levy rates – caused by varying property values between districts – which are inequitable to taxpayers and contribute to disparities in teacher pay.
In addition, the MCC proposes ending the statewide pay grid that limits teacher compensation based on service years and education and does not account for the local cost of living. This would allow districts more flexibility and control when it comes to recruiting and retaining teachers.
“The governor and others talk about brand new taxes to pay for schools, even though revenue from an energy tax or a tax on certain forms of income can’t possibly qualify as the ‘regular and dependable’ source the Supreme Court expects,” Braun said. “Our plan relies on a traditional funding source that meets the ‘regular and dependable’ standard set by the Supreme Court, and is familiar to families and employers in our state.
“Making up for decades of inattention and the resulting inequities isn’t easy, but this approach checks all the boxes. It’s sweeping, it’s straightforward, and it’s sensible.”
By Laudan Espinoza | Published on January 29, 2017
“The Campaign for Student Success applauds the Senate Majority Coalition Caucus for introducing the Education Equality Act to address McCleary and focusing on student-focused solutions for all students, attracting and retaining great educators and accountability and support for our schools. Student-based funding is a step in the right direction to meet our fundamental challenge of ensuring that our education system gives all students a great education. We’re encouraged that the Senate leadership is focusing on the standards of Funding & Fairness, Talent and Accountability put forth by our campaign. We commend this proposal for driving real legislative progress, and we look forward to working with both sides of the aisle to ensure that solutions meet the need for a long-term, equitable outcome for all students. McCleary presents us with a unique opportunity to change the future for Washington’s kids and we must take action now.”
– Campaign for Student Success
“I am very pleased to see this latest legislative plan to address the requirements of the Supreme Court and to continue the Legislature’s progress toward equitable and ample funding for our public schools. This is a creative approach and I now look forward to all parties coming together to work out their differences on behalf of all Washingtonians. We all want our kids and grandkids to have the best education possible. I hope this proposal leads to a productive session that satisfies the McCleary mandates so we can move on to higher education issues.”
– Rich Cummins, Ph.D., President of Columbia Basin College
By Laudan Espinoza | Published on January 27, 2017
The Senate Republican Caucus released details about its Education Equality Act. Below is a statement from State Superintendent Chris Reykdal on the proposal.
Olympia – Jan. 27, 2017 – We’re at a crossroad on education funding. The state Supreme Court has said the state isn’t meeting its Constitutional duty to amply fund basic education. We need solutions to this problem – big, bold solutions.
The Caucus’s proposal shows that Republicans are serious about solving the funding problem and that it understands additional resources will be needed.
The proposal itself is very comprehensive. It would create a guaranteed funding level for each and every student. The level would be enhanced for students in special programs, such as English learners or students in special education or those who are low-income or homeless, recognizing those students’ additional needs. That funding level would be paid for, in part, by a state property tax capped at $1.80 per $1,000 of assessed value.
I appreciate the emphasis on accountability and on providing additional support for underachieving students. Our graduation rates are inching upward. That pace must quicken, though, and paying teachers supplemental contracts for their work with struggling students is one way to achieve that.
I also appreciate the emphasis on teacher recruitment and retention. We have a critical teacher shortage caused, in part, because all teachers need market pay.
In the coming weeks and months we will work with the House and Senate to create a bipartisan solution that improves student achievement, empowers educators and maximizes local control.
By Laudan Espinoza | Published on January 18, 2017
This week Republican legislative leaders had their first meeting of the session with statehouse reporters. As expected the press corps asked first about education funding – including, when will they see a plan from Republicans to fully fund our K-12 schools?
A freelance writer wondered whether the plan would come in a week or two, or would we “wait until April,” meaning late in the session. The April reference struck me as something I would expect from certain Democrats, not a reporter who is supposed to be objective and professional – so I barked at him, which was out of character.
What I should have said, being a longtime Green Bay Packers fan, was something like the line famously used by Aaron Rodgers, the Pack’s quarterback, when questioned a couple years ago about his team’s production.
“Relax. We’re going to be OK,” Rodgers said. His team, 1-2 at the time, went on to win 11 of its remaining 13 games.
My answer should have been more like this: Our plan will be ready soon — sooner than later. It’s going to be OK. We will get this job done.
Democrat lawmakers put some big-spending numbers and costly concepts on paper via the recently concluded Joint Education Funding Task Force. Some have used that to take we-did-our-homework-you-didn’t shots at Republicans. But completing the homework is not the same as passing the test. When our Senate majority puts its plan on the table, I want it to be a fully baked plan that is ready to pass the test, meaning win a majority vote.
If I wanted to fire back at Democrats, I would remind them how our situation is largely of their party’s making. Democrats controlled the state budget for the better part of 30 years before our Senate Majority Coalition Caucus began leading the Senate in 2013. Their spending choices, which favored non-education things over schools by a 2-1 ratio, created the conditions that led to the 2012 McCleary decision. The MCC-led Senate has flipped that, devoting new revenue to education at a rate of more than 3-1. We have restored K-12 to its rightful place in the budget.
I would also note how, in 2013 and 2015, the governor blocked the Legislature’s request to collect K-12 compensation data. We needed it to understand, in dollars and cents, what “full funding” of education really means. Only because of the education-funding task force do we finally have that information.
Instead, I’ll simply say that Republicans aren’t about to leave schools in the lurch. But we want a solution that lasts indefinitely, and we recognize that the Legislature really has just one chance to get it right.
As I said to the reporters, our plan will be ready when it’s ready. Let me say here that it will be ready very soon.
It’s going to be OK. We’re going to get this done.