Gov. Jay Inslee will unveil his vision for Washington state over four days this week as he prepares to roll out his budget proposal for the 2015-17 biennium, which officially kicks off Monday night with coordinated town halls in Bellevue, Tacoma, Moses Lake and Spokane devoted to education policy and spending.

But a conference held by the Washington Budget & Policy Center in Seattle Friday served as the unofficial opening act for Inslee and Democrats in the Legislature, as he made the case that the state must act to curb its carbon emissions, which in turn could supply revenue for its schools and its transportation network.

The linchpin for Inslee’s policy proposals this week will be the $1 billion in new revenue his budget will seek to generate — the Office of Financial Management says the state is facing a $2.35 billion shortfall in the next biennium, without counting costs from a voter-approved class-size initiative — and a key part will be how much he chooses to rely on revenue from a potential carbon-emissions reduction program.

On Friday, speaking to the Budget & Policy Center’s Remy Trupin, Inslee hinted at an answer to that question. As he has in the past, he singled out cap-and-trade programs for praise, saying a regional cap-and-trade program run by eight states in the northeastern U.S. “has been spectacularly successful” in cutting carbon emissions.

A carbon tax, while simpler to implement, doesn’t pose a legally binding limit on carbon, which Inslee said is ineffectual in cutting emissions. So what, then, to do with the money, which estimates say could supply about $1 billion to the state?

Inslee said revenue from a carbon emissions reductions program could pay for bridges and schools, two huge sources of need for funding in the state budget, while sparking new investment into clean energy technologies and creating jobs.

Gov. Jay Inslee

“I want to stretch the dollar,” Inslee told his audience. “We ought to have polluting industries pay for it, rather than low-income people.”

PUSHBACK LOOMING?

But using carbon-emissions revenue for general government services could be singled out in the mounting opposition to such a program from the business community and the Republican-held Senate. OFM modeling on the economic impact of a cap-and-trade or a carbon tax put only 5 percent of the revenue back into state operating funds, while 30 percent would go for tax credits for low-income families and 65 percent would go back to affected industries and utilities via tax cuts.

A task force Inslee set up to analyze cap-and-trade and carbon tax programs recommended dollars generated go back to the affected industries, because they would face a competitive disadvantage due to higher costs. It also clearly stated the money should go to further reducing carbon emissions, while focusing on helping lower-income communities grapple with higher energy costs.

As ClimateWire reported Friday, states with cap-and-trade programs have seen push back for using the revenue for general government services or transportation projects. New York took out a $90 million loan from its carbon revenue fund to pay for education programs in 2009 that it’s yet to pay back, while California borrowed $500 million from its fund to pay for state government. Gov. Jerry Brown then convinced the California Legislature to devote a quarter of the state’s future carbon dollars to a legacy project he strongly favors — a high-speed rail line that would stretch from San Francisco to Los Angeles.

Would Washington lawmakers balk at using carbon-emissions revenue to pay for schools, particularly with the state Supreme Court holding them in contempt of court earlier this fall over their lack of progress in addressing its McCleary decision? The Legislature would have to pass a cap-and-trade or a carbon tax, and Inslee warned his progressive audience members of the impending assault on his policy proposals.

“There is something that we know is coming,” Inslee said. “What is coming is an assault by the polluting industries. That’s the debate we’re going to be having. They are going to say things that are fundamentally untrue.”

BUDGET & POLICY CENTER WANTS A CAPITAL GAINS TAX

Inslee’s pitch was one element of a broader theme of tax reform at the conference. Rep. Reuven Carlyle, D-Seattle and chair of the House Finance Committee, delivered a call for reforming the state’s tax code and system of tax incentives to address what he considers to be a lack of transparency and a fundamental unfairness.

House Finance Chairman Reuven Caryle, D-Seattle.

The Budget & Policy Center also revealed that it has made it a top legislative priority to convince the Legislature to implement a 6.5 percent tax on profits from the sale of corporate stocks and bonds, called a capital gains tax, over $20,000 in value for married couples, or $10,000 for individuals. That’s the same rate as the state sales tax, and would sweep in $890 million in new revenue, according to the Budget & Policy Center.

The legality of such a tax has been in question in Olympia for years, with ongoing debate over whether it’s an income tax or an excise tax. An income tax would be barred under Great Depression-era rulings from the state Supreme Court, while an excise tax is permissible.

Opponents of implementing a capital gains tax view the push with skepticism, believing the renewed efforts to have the state Supreme Court review its legality would lead it to address broader questions of the constitutionality of an income tax.

The Budget & Policy Center counters that it’s needed to strike balance in the share of the tax burden in Washington state, as the center contends the burden is disproportionately skewed toward low-income workers due to the state’s reliance on sales tax. That generates about half of the state’s tax revenue, with business & occupation taxes and property taxes covering other major shares.

“Yet, millionaires pay nothing when they reap huge windfalls from exclusive Wall Street investment partnerships,” the Budget & Policy Center wrote in a handout at the conference. “A state capital gains tax would help correct that fundamental imbalance.”

Carlyle has been shopping the idea of a capital gains tax in recent weeks in Olympia, but didn’t touch on it during a speech he gave on tax reform Friday. In a post on his Twitter account last week, he said “it’s time for progressivism in tax policy” and called a capital gains tax a “thoughtful idea.”

Instead, Carlyle took aim at the state’s system of tax incentives, saying the Legislature has given favorable treatment to taxes paid by high tech companies, the aerospace industry, agriculture and the timber industry, which leaves them off the hook for paying for government services like education.

Without an income tax and because a voter-approved initiative limits growth in property tax to 1 percent annually, Carlyle said the state is left without “meaningful contributions” to meet its needs. He also said the Democratic Party “has profoundly failed, abdicated its responsibility,” to win the argument on the need to raise taxes, ceding the debate to the opposition.

Carlyle said it’s created a situation where the 20 percent of the state’s lowest-income workers pay a higher share of their income to taxes than the top 1 percent does. While he said reforms are needed to improve transparency in tax incentives, he did not specifically call for any to be closed during his speech Friday. Inslee’s budget proposal will, OFM Director David Schumacher told reporters last week.

“Our tax structure is fundamentally upside down and backward,” Carlyle said. “We are on the march to becoming a low-tax, low-service (state). We have to have the humility to appreciate the profound implications to our state and our quality of life.”

Sen. Michael Baumgartner, R-Spokane, balanced the Democrats’ views during a talk with Schumacher and Rep. Ross Hunter, D-Medina and chair of the House Appropriations Committee. Asked whether he could muster the votes to raise the state sales tax, Hunter answered bluntly, “No.”

Rep. Ross Hunter, D-Medina

“We have to come out of this session with a sustainable budget that funds our priorities,” Hunter said.

Baumgartner said the Legislature has to be realistic about what would get through the political climate as it currently stands in Olympia — meaning 25 votes in the Senate, 50 votes in the House, and the Governor’s approval.

State Sen. Michael Baumgartner, R-Spokane.

“I think an income tax is a bad idea,” Baumgartner said. “There’s a lot of people going in with unrealistic (proposals). Where does the Venn diagram meet for that 25 plus 50 plus one?”

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