Republican State Senator Mark Schoesler is featured explaining why the tax, which just passed out of the Ways and Means Committee, is bad for the state.
Republican State Senator Mark Schoesler is featured explaining why the tax, which just passed out of the Ways and Means Committee, is bad for the state.
State Senate Republicans are coming out hard against the majority-Democrats’ new income-tax bill, but Tracy Ellis tells us they’re also offering solutions.
The orcas won’t want to hear this, but the $54 billion budget Governor Inslee brought out last week is not the proposal he was required to submit to the Legislature.
Under a state law dating to at least 1959, the governor is to provide a budget document based on “the estimated revenues and caseloads as approved by the economic and revenue forecast council and caseload forecast council or upon the estimated revenues and caseloads of the office of financial management for those funds, accounts, sources, and programs for which the forecast councils do not prepare an official forecast.”
In short, Inslee is to submit a no-new-taxes budget. It’s known informally as the “Book 1” budget. The law allows the governor to also submit a proposal that reflects “revenue sources derived from proposed changes in existing statutes” – as in new or higher taxes. This purely optional “Book 2” budget is what Inslee unveiled December 13.
Under a 1973 law, also part of the state code on budgeting, the Book 1 budget is due no later than December 20. I am told it was finally posted online today (apparently buried somewhere on the fiscal.wa.gov website). Is anyone in the governor’s office aware that failing to meet the deadline is a misdemeanor?
Inslee also took an under-the-radar approach to releasing his Book 1 budget in 2017. At the time, a member of the Capitol press corps explained to me in so many words that a Book 1 budget wouldn’t be relevant anyway, because Inslee wasn’t pushing it publicly. The perception was that Inslee’s real priorities – the stuff worth reporting – were in that year’s Book 2.
News flash: Inslee’s real priorities are in the Book 1 budget. It shows what goes in the budget box and what doesn’t when revenue is limited. That’s much more than a formality. It’s also very different from a Book 2, which is like making a shopping list, then compiling a list of new taxes to cover it.
The Book 1 budget tells the orcas whether they still get $1.1 billion even if Inslee can’t include revenue from a state income tax. Or, without revenue from raising the B&O tax, where Inslee cuts to protect funding for the new collective-bargaining agreements. If a budget is a “statement about what we value,” as Inslee once said, then comparing his Book 2 and Book 1 will reveal something about his values. To me, that’s newsworthy.
As a fiscal conservative who sees no need to raise taxes for 2019-21, because a whopping $50 billion is forecast to be on hand, I’m interested in seeing Inslee’s no-new-taxes budget. It might have some actual value to legislative budget writers, unlike a Book 2 wish list that hinges on tax votes that may not happen.
Did someone think keeping Inslee’s Book 1 budget under wraps until the Friday before Christmas, despite the legal deadline, would minimize the attention it will get? That’s even more reason for the news media (and taxpayers) to take interest.
Governor Inslee had included tax increases in all six budgets he’d submitted to the Legislature during his time in office. I figured he was a lock to make it 7-for-7, in the proposal he’d be putting on the table for 2019.
Even so, I was amazed by what the governor unveiled yesterday. He’d spend $54 billion over the next two years – up $10 billion, or 22 percent, from the current budget cycle. He wants to tax personal income for the first time, plus a 67 percent tax hike on more than 175,000 employers who provide services, from health care to janitorial. He’d also set property owners up for more than double the local-education taxes they’re paying now.
The governor’s budget is so over the top that words like “staggering” still can’t capture its magnitude. Inslee has outdone himself this time, to the point of seeming downright insatiable when it comes to taxes and spending.
State government is expecting to collect $50 billion in revenue over the next two years. That’s $4 billion-plus over the current budget cycle. We have more billions in reserve than ever. Yet somehow, it’s still not enough. Besides all the naturally occurring revenue plus revenue from the huge tax increases, the governor wants to tap the reserves for another $1 billion.
I don’t know why Inslee thinks a state income tax would be constitutional. And speaking of the constitution, the Legislature just got through bringing the state’s K-12 funding system back into constitutional compliance. Why does Inslee want to undo that progress by going back to the local-education levy rate that encouraged the growth of educational inequities across Washington, and helped lead to the McCleary lawsuit in the first place?
On top of that, the K-12 reforms we adopted in 2017 are still kicking in, and they’ll lower the majority of 2019 property-tax bills across the state. If Inslee wants to discard the bipartisan levy cap we’d put on school districts, he’d better be ready to accept credit for the huge property-tax increases that are sure to follow.
It’s been more a month since Republican senators stepped forward with ideas about affordable housing/homelessness, and even longer since we shared an agenda about improving mental-health treatment. I appreciate that the governor’s budget also addresses those topics, although this is more a case of having common ground on the “what” but not the “how.”
The Legislature is free to ignore Inslee’s budget. But with Democrats controlling both the state Senate and House for only the second time during his years in the mansion, and with larger majorities than 2018, look for it to serve as a cue card instead.
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