Inslee Proposes $1.2 Billion in Tax Increases for Education – But Says They Aren’t Tax Increases

Democratic Governor’s Sketchy Budget Proposal Goes After Tax Breaks, Makes ‘Temporary’ Taxes Permanent – Why are Republicans Smiling?

By Erik Smith
Washington State Wire

Gov. Jay Inslee rolls out his spending plan, replete with $1.2 billion in new revenue.

Gov. Jay Inslee rolls out his spending plan, replete with $1.2 billion in new revenue.

OLYMPIA, March 29.—Gov. Jay Inslee laid out a $34.4 billion spending plan Thursday that artfully attempted to cover his campaign pledge not to propose a tax increase – while proposing $1.2 billion in tax increases.

By raising taxes on everything from beer to software to automobile trade-ins, the Democratic governor said he can find enough money to finance a Supreme Court ruling that requires big new spending for the state’s K-12 schools. And he insisted that there is no contradiction with the no-tax-increase promise he made on the campaign trail last fall. Apparently it’s all how you look at it: Raising taxes is one thing, the governor said, but eliminating tax breaks and reimposing taxes that are due to expire are entirely different matters.

“To govern is to choose, and today I choose, and I believe we all should choose, education over tax breaks,” he said. “And to make good on our constitutional and moral duty to pay for quality schools for our children. It is our duty and we will do it. When we give these tax breaks a hard look, they just don’t measure up to the urgent need for better funding for our schools and our children.”

All semantics aside, Inslee’s not-so-modest proposal finally cleared up one of the biggest mysteries that has hung over this year’s legislative session. The state has an additional $2 billion to spend in its 2013-15 budget, but few believed Inslee would be able to make the books balance with that money alone. And as it turned out, he couldn’t. He didn’t even come close. His spending proposal is roughly $4 billion bigger.

Republicans didn’t bother expressing shock – some had even joked before the session started that they were taking bets on the day Inslee would release his tax-hike plan. And in the Senate the Republican-leaning majority says it will release a budget proposal next week that shows no big increase is necessary. Senate Republican Leader Mark Schoesler, R-Ritzville greeted reporters with the grin of a ballplayer who knows he has the game already won, but can’t explain how he knows. “If I wasn’t confident, I wouldn’t be here,” he said.

Politically Dicey

Why is this man smiling? Senate Republican Leader Mark Schoesler, R-Ritzville, says the Senate Majority Coalition will shortly release a budget proposal that shows no big tax increases are needed.

Told-you-so grin: Senate Republican Leader Mark Schoesler, R-Ritzville, says the Senate Majority Coalition will shortly release a budget proposal that shows no big tax increases are needed.

Even if Inslee’s proposal was the only idea on the table, its prospects would be politically dicey. Proposals to end tax exemptions – or close “tax loopholes” – never seem to get very far, because every interest group with a tax break at risk can usually make a case to the Legislature for its continuance. Indeed, many of Inslee’s targets seem to be old favorites – proposals heard the last time Legislature considered mass repeal back in 2010, leading some wags to call it an exercise in cut-and-paste.  

Among the standbys are a proposal to eliminate a sales tax break for custom software and an attack on the state’s trade-in sales-tax exemption. The latter proposal would eliminate the exemption for trade-ins over $10,000 – a big hit to the car business, not to mention the markets for recreational vehicles, boats and farm machinery. Where industries enjoy preferential business and occupations tax rates, those tax breaks would be cut by 25 percent, a proposal floated by Senate Democrats two years ago. The sales tax would be extended to bottled water, a plan approved by the Legislature in 2010 and overturned by Washington voters. And residents of Oregon, Montana and other states with no sales tax would lose their exemption when they shop in Washington – an oft-floated idea that is beaten back by angry merchants in border areas, year after year.

All told, elimination of those tax breaks and others would raise $565 million over the next two years.  Inslee also would reimpose of a pair of “temporary” taxes from 2010 that are set to expire at the end of June – a 50-cent-a-gallon tax on beer and a surcharge on the state’s business and occupations tax for service businesses. Inslee would make those taxes permanent, raising $661 million.

Inslee would pump that $1.2 billion into K-12 education, staking out his position in one of the session’s central arguments – how much to spend in the next budget to satisfy the Supreme Court ruling. The McCleary decision gives the state five years to ramp up spending. Minority House Republicans have suggested a somewhat smaller figure of $800 million, but the more decisive proposals are still to come from the Republican-leaning Majority Coalition Caucus in the Senate and the majority Democrats in the House.

The rest of Inslee’s spending increase is accounted for by the usual grab-bag of budget maneuvers and by a fix to the state’s estate tax for married couples, largely invalidated by a recent Supreme Court ruling. Those add up to $760 million. Also worth noting: Inslee is figuring on another round of tuition increases at state colleges and universities, in a sense another type of tax increase, paid for by students and their parents. Tuition increases at the University of Washington and Washington State University would be “limited” to 5 percent — presumably meaning the schools would raise tuition by that amount — and to three percent at regional schools.

Says No Vows Broken

At his news conference Thursday, Inslee said it’s really a simple choice – tax breaks versus kids. After years of recession, he said there aren’t any easy places left to cut. Flanked by students from Seattle’s Cleveland High School, he said he challenged anyone to say a business tax break was more important than their education.

“We just had to make a choice about what tax breaks are not as important to the state of Washington as the education of our students. I mean, that was the fundamental question. There are tax breaks that have produced economic growth in our state, but there are a number that have not.”

And for the sake of those who are now poring over old transcripts of last year’s debates and campaign appearances to find the exact wording of what was widely perceived as a no-new-tax promise, Inslee insisted Thursday he broke no vows. Part of the reason for confusion is that for legal purposes there is no difference between ending a tax break and raising taxes — that point has been established by years of rulings in the House and Senate as well as by the common assumption of the Legislature. And during debate appearances last year Inslee repeatedly used phrases like “I am not proposing a tax increase” and “I don’t believe that tax increases are the right route forward for our state.” When those statements were interpreted by the press as a no-tax promise, Inslee’s campaign did nothing to offer a correction. But to be perfectly fair Inslee also said numerous times during the campaign that he planned to take a whack at tax loopholes as part of his plan to wring more efficiencies out of state government, which tends to indicate that he was making a distinction even at that point. Since the election he has offered further clarification. He said Thursday his pledge referred only to new general taxes borne by the state’s taxpayers as a whole. He also maintains that a measure continuing an old tax cannot be considered a tax increase. 

One quibble: At the same time Inslee would make the beer tax permanent, he would extend it to microbreweries for the first time. So at least for small brewers it is a new tax, and presumably that would be paid by Washington citizens as a whole — beer-drinkers anyway. Budget director David Schumacher said the extension of the tax is seen as the elimination of an exemption — thus no new tax even if it might look like one. And for his part, Inslee said he has nothing against beer, that he loves microbreweries and he might even be known to take a sip of an adult beverage from time to time. But he said, “The amount people will be spending for beer is the same tomorrow as it was yesterday, so I am fulfilling my commitments to a T.”

Told-You-So Grin

In the scheme of things, a budget proposal from a governor isn’t horribly meaningful, because it is the Legislature that writes the final bill. And in Inslee’s case, that might go double, because the governor didn’t release a fully-fleshed-out budget bill of his own. What he issued Thursday might better be described as an outline of his spending plans. House Appropriations Chair Ross Hunter, D-Medina, said the governor’s proposal “is in the right ballpark,” and at least on the broad strokes there’s plenty of agreement from his team.

“These may not be the exact decisions our caucus will make, but it is very appropriate for us to look at the value of return we’re getting from some tax loopholes that have been on the books, without review, for decades,” he said.

But Schoesler, with his told-you-so grin, said the Majority Coalition Caucus will write a budget that looks dramatically different. Republicans in the House and Senate have already said they may target a few tax breaks, and they also may endorse some of the same budget maneuvers as they struggle to find money for McCleary. But the Senate majority won’t target tax breaks that are there for good reason, Schoesler said. Instead his team is scouring the budget looking for efficiencies and taking a dim view of agency carry-forward budget proposals. “You’re not choosing between kids and tax cuts,” he said. “You’re choosing between [kids and] bureaucrats and tax hikes.”

Free-for-All Begins

And with that begins a battle that involves every interest on Inslee’s hit list – now that it has become clear which tax breaks are in play. The beer biz already has its Facebook page up and running, with a countdown clock ticking the minutes until the day the temporary tax supposedly goes away. The Washington tax is five times’ Oregon’s and nine times Idaho’s, said Steve Jones, director of operations for Red Hook Brewery. “Governor Inslee today said he loved the Washington beer industry, but extending the beer tax scheduled to end July 1st shows no love,” he said.

And whatever Inslee wants to call his new taxes, they don’t smell any sweeter, said Association of Washington Business President Don Brunell. “Whether it’s called a tax increase or ‘closing a loophole,’ the result is the same: Families and employers pay the government more money,” he said.

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