Read more about the what the chair of the Senate’s water-related committee, Sen. Judy Warnick, R-Moses Lake, has been doing to help rural families suffering as a result of the flawed Hirst decision.
Since the regular session, Warnick who sponsored the Hirst-fix legislation, Senate Bill 5239, has been working to elevate the issue and keep rural families at the fore of discussions in Olympia.
- In late 2016, the state Supreme Court issued a ruling resulting from a challenge to rules in Whatcom County relating to the Growth Management Act.
- The ruling turned decades of water law on its head by requiring local jurisdictions, such as counties, to make legal determinations on water availability before issuing a building permit, something the state Dept. of Ecology already had done.
- Dissenters on the court noted, ““The majority’s decision hinges on an interpretation of RCW 19.27.097 that is unsupported by the plain language of the statute, precedent, or common sense.”
- Counties and cities do not have the financial resources or technical expertise to make these judgements.
- This effectively halted home building in rural parts of the state by requiring costly and duplicative studies to make legal determinations of water availability before a small, household well can be drilled.
- When the 2017 legislative session began, the impacts of the decision became apparent, as counties and cities, did not know how to handle the decision. Counties took different approaches including building permit moratoriums, creating confusion.
- The Senate Majority acted to address the problem. Sen. Judy Warnick, R-Moses Lake, introduced Senate Bill 5239, a bipartisan proposal to clarify the law and give certainty to property owners and local jurisdictions.
- During public hearings on the proposed Hirst fix legislation, property owners from around the state pled for a solution, some spending their life’s savings to build a home on a property only to be told they couldn’t and facing the possibility that the property had lost its value.
- The Senate passed E2SSB 5239 (An Act Relating to Ensuring that Water is Available to Support Development) on February 28, by a vote of 28-21. The bill was referred to the House Committee on Agriculture and Natural Resources.
- The House ANR Committee held a public hearing on the bill on March 28, one day before policy committee cutoff for bills from the opposite chamber.
- On March 29 – cutoff – the House committee failed to vote on the bill, meaning that the bill did not move out of the committee according to the required legislative timeline for policy bills.
Published opinion pieces from members of the Majority Coalition Caucus draw the connections between McCleary and the long-running effort to impose an income tax.
Senate Majority Leader Mark Schoesler, in The (Spokane) Spokesman-Review, Jan. 8, 2017: Income tax is the real issue, not schools
“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?”
Sen. Mike Padden, R-Spokane Valley, in the Valley News Herald, Jan. 13, 2017: An out-of-bounds court casts shadow over Legislature
“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.”
Sen. Tim Sheldon, D-Potlatch, in Crosscut, Jan. 20, 2017: The monster lurking behind school funding – an income tax
“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.
WTNH-TV (New Haven, Conn.), April 28, 2017: Income tax revenue collapses; Malloy says taxing the rich doesn’t work
“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.”
New Haven Register, May 1, 2017: Drop in income tax receipts plunge Connecticut’s budget further into deficit
“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 Mirror, May 2, 2017: House speaker: Deficit too great to rule out income tax hike
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 (Tacoma) News Tribune, April 6, 2017: House Democrats want a capital gains tax to raise money for their budget plan – is it even legal?
“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.”
Jared Walczak, Tax Foundation, in Tri-City Herald, May 12, 2016: Capital gains taxes are too unreliable to fund education
“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.”
Jared Walczak, Tax Foundation, March 24, 2017: A capital gains tax would be more volatile than Washington state revenue projections suggest
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.”
Washington Policy Center, April 2017: State revenue departments describe capital gains income taxes
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.”
Los Angeles Daily News, Dec. 1, 2016: California budget analysis calls for caution
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.
Seattle Times, May 1, 2017: Seattle City Council votes to pursue income tax on ‘high-end households’
“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.”
Seattle Times, April 21, 2017: Debate over a Seattle income tax is heating up – How did we get here?
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.”
Publicola, April 21, 2017: First the city, then the state: The fight for an income tax begins (again)
John Burbank, Economic Opportunity Institute: “What we want is to bring it to the Supreme Court for review and reverse their decisions from 1933 and 1935.”
The (Tacoma) News Tribune, Oct. 16, 2016: How an Olympia ballot measure could pave the way for a statewide income tax
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.
Matt McIlwain, Madrona Venture Capital, in Seattle Times, March 15, 2017: More taxation threatens to dampen state’s robust economy
“…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.”
The (Longview) Daily News, editorial, April 26, 2017: Income tax again?
“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?”
Washington Policy Center, March 2017: Legislative Memo: HB 1730 and SB 5111 would impose a capital gains income tax in Washington state
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.”
Washington Research Council, March 31, 2017: Special report — Proposals for a state capital gains tax
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.”
Jason Mercier, Washington Policy Center, in Seattle Times, Sept. 16, 2016: State should make state income-tax ban crystal clear
Guest column urges support for a constitutional amendment banning an income tax. The proposal was defeated on the Senate floor March 7 due to opposition from members of the Senate Democratic Caucus.
Jason Mercier, Washington Policy Center, in Seattle Times, Nov. 19, 2015: Lawmakers aren’t listening to voters on tax increases
Guest column notes that Washington voters have repeatedly voted for rules requiring a two-thirds vote of the Legislature before taxes can be increased.
Washington Policy Center, March 2017: History of income tax votes in Washington
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.