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Inslee Rolls Out Capital Gains Tax, $5B Increase in State Spending

In describing the prospect of taxing carbon emissions last week, Gov. Jay Inslee said it offers Washington state “a two-fer, maybe even a three-fer” because it would generate money for education, transportation and cut carbon pollution statewide.

That also serves as an apt descriptor of the tax policy proposals he finally made public along with the rest of his budget Thursday.

In addition to the $1 billion in carbon revenue from a cap-and-trade program, Inslee plans to push for a 7-percent tax on capital gains in Washington that would net another $800 million in revenue, while taking aim at five tax breaks worth $282 million, and $56 million from increasing taxes on cigarettes and beginning to tax e-cigarettes.

The governor also plans to pull $537.5 million from the state’s reserves as one-time money for costs, and finally make $211 million operating cuts and $212 million in savings by relying more on federal dollars and shifting costs out of the general fund.

Add it up and you have a $5 billion increase in state spending over the next two years to $39 billion. State revenues are expected to increase by $2.9 billion in the next two years due to forecasted growth in the economy.

On the chopping block for tax breaks: $105 million in sales-tax exemptions for vehicle trade-ins worth more than $10,000, a use-tax exemption worth $51 million on fuel extraction, $52 million in sales-tax exemptions for out-of-state residents, cutting a sales-tax exemption on bottled water worth $44 million, and ending a business and occupation tax rate on royalties that amounts to a $30 million hit to state tax coffers.

In proposing this budget, Inslee confronted the fact that he’s breaking a campaign pledge not to seek tax increases from two years ago, but said costs have grown, and blamed the Legislature for not going along with his plan to close tax breaks.

“We cannot balance this budget and educate our children on cuts alone,” Inslee said. “We simply have not been able to generate the revenue necessary. I had hoped to avoid this route.”

Given that the money would go for satisfying the state Supreme Court’s McCleary decision, transportation projects, and a host of other needs, Inslee said it’s time to move beyond a cuts-first mindset toward government services and reinvest in Washington.

“It provides a sustainable solution go Washington’s structural budget problem,” Inslee said. “These are the principles of a sound budget.”

It also flexes his political muscle. It’s now up to Democrats in the House to take the proposal and offer up their own, but the proposal is really directed at Senate Republicans. Inslee said Thursday he was open to other ideas, but pointedly asked if the Republicans could accomplish the same things without raising taxes.

Sen. Andy Hill, R-Redmond and the budget writer in the Senate, said Inslee’s plans avoids tough choices on prioritizing state spending, and instead opts for an easier route in raising taxes.

“Investing in student achievement and providing essential services should not depend on risky tax schemes that threaten our economy,” Hill said in a statement. “Educating our children, caring for those in need and supporting our local economy demands thoughtful, bipartisan budget leadership. Tax increases should be the last resort, not the first.”

In his re-election campaign this year, Hill pointed frequently to the fact that a budget he helped write last year added $1 billion to education while slowing the rate of growth in other general government spending.

However, it took until the last week in June to finally hammer out the agreement on the final budget – it’s legally required by June 30 or risks a government shut down – and the tax and spending policy proposals now on the table suggests the state could be in for another lengthy legislative session.

SOUND STRATEGY ON CAPITAL GAINS?

Critics of a capital gains tax called it volatile and would subject the state budget to swings in the stock market, as the revenue would be derived off of earnings from sales of stocks or bonds greater than $25,000 for individuals, and $50,000 for couples.

Inslee includes exemptions for retirement accounts, farms and the timber industry, homes worth less than $250,000 for individuals or $500,000 for married couples, as the Seattle Times reported, and wouldn’t touch income earnings.

The revenue wouldn’t start coming in until 2016, as Office of Financial Management Director David Schumacher said the state would need time to set up the taxing mechanisms.

Inslee said the 7 percent rate is lower than similar taxes in California, Oregon and Idaho, and believes it’s time for the wealthy to begin paying more towards state services.

“Rising income inequality is a serious problem in our state,” Inslee said. “We need to address this. Our state’s unfair tax system hits low- and middle-income people harder than it should.”

But Jason Mercier of the Washington Policy Center offered up a counter point, citing a fiscal note from a House bill that would have implemented a capital gains tax two years ago that called it “extremely volatile” and similar characterizations of it from California’s nonpartisan Legislative Analyst’s Office.

“In a state that budgets for a two-year period and is required to project being balanced over four-years, ‘extremely volatile’ and ‘unpredictable’ do not seem to be the best building blocks for a solid, fiscally sound, secure and stable budget,” Mercier wrote on the Policy Center’s website.

House Rep. Reuven Carlyle, D-Seattle and chair of the Finance Committee, wrote on Twitter that he concurred with the Policy Center’s read of the situation, but believes a capital gains tax could be done in ways that would keep it from being a revenue roller coaster. The governor’s “first draft is strong,” Carlyle wrote.

Inslee responded to that criticism in his address. “I think it’s a lot less risky than zero,” he said.

INSLEE ADDRESSES CUTS

As with past governors seeking a tax increase, Inslee provided the public with a series of draconian cuts to state services that he said would result without new revenue.

More costs would be passed on to state universities, more low-level offenders on parole would be cut from state supervision, the prison population would have to decrease, while more inmates would serve longer sentences in county jails.

Fewer children would be able to enroll in early learning programs, and state-run fish hatcheries would be forced to close as more cuts would come to social programs, affecting foster children’s benefits beyond the age of 18. Juvenile courts would lose funding.

The list is often seen as a “worst-case scenario” from Republican opponents to tax hikes, but Inslee has now made it incumbent upon them to call the bluff.

He stated that given the deep budget cuts Washington experienced in the depths of the recession, it was now time to refocus on new spending.

He held up another state Supreme Court mandate to stop warehousing mentally ill patients in hospitals that will cost the state $58 million to comply with, although this measure figures to have bipartisan support.

“We have already slashed mental health way past the bone,” Inslee said. “We’re into the artery. Now we’re looking into the cartilage.”

Asked to provide examples of efficiencies his administration has gained, he cited $2 million saved from switching to a new phone system, eliminating an eight-month backlog of collision reports at the Department of Transportation, and saving $8 million on state leases over the next five years.

Republicans would offer a different take on those savings, in light of the spending increases Inslee is pushing for, including about $1.5 billion in employee and teacher costs due to planned salary and benefit increases, as well as pension contributions.

“Any conversation about our state’s budget and the upcoming session needs to include the reminder that we are expecting nearly $3 billion more in new revenues for the next budget cycle – an 8 percent increase!” Rep. Bruce Chandler, R-Granger, said in a statement. “If Washington can’t balance the budget with an 8 percent increase in revenues, folks back home should be very concerned.”

The governor counters that he believes it is well past time to give salary raises the state’s workforce and to teachers, and contended that “it’s not raining, it’s a downpour” in saying the state should task its fiscal reserves, called a rainy-day fund, to balance the budget. That would need 60 percent approval in the Legislature,  Schumacher said.

“We are going to succeed this year,” Inslee said. “I’m going to welcome all ideas from all parties. This is the best plan I can put together.”