House Democrats on Friday released a $38.8 billion budget proposal that includes $1.4 billion in new taxes, including a new capital gains tax and changes to the business and occupation tax.
Money raised from the new taxes would fund education, including operating costs, all-day kindergarten, smaller class sizes through the 3rd grade and college readiness programs.
“Without investment, you can’t have a return on investment. That’s what this budget is,” said House Majority Leader Pat Sullivan at the budget rollout on Friday.
The budget spends an additional $588 million in cost-of-living pay raises and health benefits for teachers. While allocating $412 million to reduce class sizes for kindergarten through 3rd grade, it does not fully fund Initiative 1351, the class size reduction measure passed by voters last year.
Lead budget writer Rep. Ross Hunter said he believes the budget meets the mandate to fully fund basic education in the McCleary decision by the state Supreme Court. “I think the court will be fine with this,” he said.
The budget would freeze tuition at the state’s colleges and universities for the next two years, and also provide $8 million dollars for a new Washington State University medical school that was given the green light to open by the Legislature this week.
The budget also funds more mental health beds in community facilities and state hospitals, as well as $5.1 million for “Joel’s Law.” The bill is named after Joel Reuter, who was shot by Seattle police after having a mental health breakdown. It allows families to appeal to a court if mental health professionals decide not to involuntarily commit someone who is mentally ill.
“We want to make sure people can get the help they need at the time they are having a crisis,” Hunter told reporters.
Among the largest sources of new revenue is a capital gains tax, which would raise about $570 million for the two-year budget.
Individuals who earn more than $25,000 in profits on the sales of stocks and bonds, or married joint filers earning more than $50,000 in profits, would pay a 5 percent capital gains tax under the proposal. It would not apply to retirement accounts.
Budget leaders estimate about 32,000 Washington residents would begin paying the capital gains tax starting in 2016. “This is for the super wealthy,” said Rep. Reuven Carlyle, D-Seattle.
Critics say the capital gains tax is too volatile to use as a reliable source of revenue, which Democrats acknowledge. “We’re not pretending anything other than that,” said Carlyle.
To protect against fluctuations, Carlyle said the budget only counts on $400 million a year from the capital gains tax to go toward paying for basic education requirements. Any additional money raised above that threshold would go into a higher education fund.
Another $532 million in new revenue would come from changes to the business and occupation tax. It would increase the B&O tax by 0.3 percentage points for certain businesses, while also reducing or eliminating the tax for about 15,000 small businesses.
Online retailers that do not have a physical presence in Washington — such as eBay or Etsy — would be required to start collecting tax from online transactions. Currently, only companies with an presence in Washington, like Amazon, collect tax from online sales.
Democrats also propose eliminating several tax breaks. Out-of-state residents would no longer be exempted from paying sales tax when they shop in Washington, and sales tax would be added to the cost of bottled water. It also eliminates a tax break for oil refiners and other industries, including travel agents.
Lead Republican budget writer Sen. Andy Hill criticized the budget for imposing new taxes when the state has $3 billion in new revenue coming into the state. “When you don’t use that to pay for education and instead you use taxes – quite frankly, I don’t know if that’s unconstitutional or just unconscionable,” he said.
Hill said the Republican budget proposal will not use taxes to “pay for what is our constitutional duty.” However, he said both budgets emphasize mental health spending, higher education and early education.
The Democratic budget does not include the carbon pollution charge or higher cigarette taxes proposed by Gov. Jay Inslee in his budget. Carlyle told reporters that legislators felt they needed more time to look at the “long-term financial implications” of the carbon pollution charge and its impact on funding education.
Inslee’s budget does include a capital gains tax of 7 percent. Democrats say they chose to go with the lower 5 percent figure, which would put Washington among the bottom four of the 41 states that impose the tax.
In a statement, Inslee said it was “disappointing” that House Democrats decided not to pursue the carbon pollution charge. However, the governor supports the capital gains tax, which he said is “a small step toward fixing the most unfair state tax system in the nation.”
The House Appropriations Committee has scheduled a public hearing on the budget on Monday at 1:30 p.m. TVW will carry the hearing live at this link. Legislators are expected to vote on the budget in committee the following day.
The date of the public hearing was rescheduled from Friday to Monday after a letter was submitted to House Speaker Frank Chopp by House Republicans who said they were “troubled” that the public would not have enough time to review the document.
Senate Republicans are expected to release their budget proposal next week.