Article by Erik Smith. Published on Wednesday, April 27, 2011 EST.

Despite Owen Ruling, Liquor Interests Hint at Court Challenge – Budget Could be Overturned

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, April 27.—A raid on the state liquor fund could pose a nuclear challenge to the state budget, and a hair-splitting legal ruling on the Senate floor last week from Lt. Gov. Brad Owen certainly hasn’t ended the argument. In fact, Owen may have made it deadlier.

            Phil Talmadge, the attorney representing the Distilled Spirits Council, warns that a challenge to the entire state budget could be mounted in court if lawmakers continue with their plans to raid the state liquor account for $85 million. If successful, the entire state budget could be tossed.

            It is one of three big challenges to this year’s state budget, two of which have yet to play out on the Senate floor. Hospitals and non-profit nursing homes are planning challenges to policy bills when they come up for a vote in the Senate. All together, the three biggies could blow a $365 million hole in the spending plan lawmakers are contemplating for 2011-13. But the challenge on liquor poses the greatest hazard for lawmakers, because the raid is embedded within the budget itself.

            If Talmadge is right, the liquor raid constitutes a tax increase that forces the Legislature to pass the budget by a two-thirds vote, not a simple majority. For political reasons, that just isn’t going to happen – the budget bill is likely to just squeak through in the House. What it means is that if liquor interests go to court and win the case, the budget itself could be overturned.

            It all hinges on a legal argument Owen dismissed when the issue was raised on the Senate floor last week. Owen, the independently-elected presiding officer of the Senate, is regarded as the Legislature’s most impartial judge of matters like this one. Had Owen accepted the argument, the liquor raid no doubt would have been stricken, and lawmakers would have had to find another way to come up with $85 million.
            The problem is that Owen’s ruling came down to such a fine legal point that it can’t be considered the last word. In fact, the senator who raised the issue – Tim Sheldon of Hoodsport – says he’s thinking about posing the question again when the budget comes up for a final vote, because new information from the state Liquor Control Board tends to support Talmadge’s argument.

            In other words, it ain’t over yet.

            “This is typical of what happens when you’re in desperate times and you are desperately seeking revenue,” said Talmadge, a prominent former state senator and Supreme Court justice. “You start doing things you should think carefully about.”

            I-1053 is the Issue

            The Legislature deserves high marks for creativity, anyway. What it did with the liquor raid is to invent a way to raise revenue from the general public and put it in the state general fund without passing a tax increase. The question is whether it can do it without a two-thirds vote.

            The reason for the circumlocution is Initiative 1053, the anti-tax measure passed by voters last year. The measure requires a two-thirds vote of the House and Senate in order to pass tax increases. Republican votes would be needed for that, and since Republicans say they won’t provide any, you don’t see any garden-variety tax increases in this year’s budget proposal. Lawmakers are struggling with state spending that is about $3 billion out of whack, and most of it is going to come from cuts.

            But hidden tax increases are a different matter – hospital, nursing home and liquor interests say they’re being gored that way. The liquor raid is really the cleverest of the bunch.

It’s a maneuver so subtle that it escaped challenge when the Legislature did the same thing two years ago. At the time, the similar I-960 imposed the same two-thirds requirement, and the same challenge might have been raised at that point, if anyone had thought to take matters that far.

            Will Raise Liquor Prices

Here’s how it works. The Legislature is withdrawing $85 million from the state liquor revolving account and putting the money in the state general fund. The revolving account is the Liquor Control Board’s bank account, where it puts the money from sales at the state liquor stores and where it writes checks to state and local governments. What makes this raid different than all the others contemplated in this year’s budget is that the bill says the Liquor Control Board can’t cut the amount it pays out.

The liquor board doesn’t have $85 million to spare. So that doesn’t leave it any choice. It has to jack up the price of liquor.

That’s what it did the last time. Two years ago, lawmakers took $80 million from the same account. The board promptly turned around and raised the state’s “markup” on liquor from 39 percent to 51.9 percent. That increase was supposed to expire this year and the markup was supposed to revert to the old rate.

What’s new here is that the Liquor Control Board is now saying that it will do the same thing again. The governor’s budget plan and the House budget proposal would force the Liquor Control Board to reimpose the 51.9 percent rate. And it would go even higher under the Senate proposal, which exempts the restaurant industry. In response to an inquiry from the liquor industry, Randy Simmons, director of administrative services for the Liquor Control Board, stated in an email April 15 that the Liquor Control Board would have to raise the markup to 59 percent. What it means is that the average bottle of booze sold at retail in state stores will rise from about $15.95 to $16.55.

           ‘Use Your Imagination’

The key thing is this. The Legislature isn’t telling the Liquor Control Board to raise the markup. But the only other way it could possibly raise the money is to find a big satchel of money in the men’s room.

Earlier this month, Senate Majority Leader Lisa Brown said she didn’t think that constituted a tax increase. “I don’t believe utilizing money from an account is a tax increase,” she said. “I’ll leave it at that for now.”

Talmadge maintains it is a tax increase in all but name. The Legislature is telling the Liquor Control Board to use its imagination to find the money and then disclaiming responsibility for the way it does it. “It’s as if they’ve got their hands in their pockets and they’re looking up at the sky and saying, we don’t how it got there,” he said.

A Curious Ruling

Owen entered the picture last week when the budget came up for a vote on the Senate floor. Sheldon asked him to rule on whether the raid on the liquor account ought to be considered a tax increase, and therefore, whether the entire budget had to pass on a two-thirds vote.

Owen’s ruling hinged on a single hair-splitting point. The Legislature didn’t tell the Liquor Control Board exactly how to come up with the money. Owen said:

           “It is possible—perhaps even likely—that Sen. Sheldon is correct: the transfer will leave an insufficient balance in the account which the Liquor Control Board can only make up by raising liquor prices.  This is not, however, the only possible outcome.  Possibly the board would make additional service or facility cuts, or perhaps it would take some other action to cover the difference.  Perhaps the estimates in this budget are incorrect, and there will be sufficient sums to cover the transfer.  In fact, perhaps many possible things could happen, many different scenarios could eventuate—but it is not possible, at this point in time, to determine with precision which scenario will ultimately come to pass.”

            If it Walks a Duck

            Oh, come on, Sheldon says. Anything could happen. But if the Liquor Control Board says a price increase will happen, that ought to be good enough for government work. “They can’t possibly take the money out of there without raising the markup,” he said.

            The statement from the Liquor Control Board might be grounds for a new challenge when the budget returns to the Senate floor later in the Legislature’s current special session, Sheldon said. “I’d be willing to do it,” he said.

            And Talmadge says that Owen’s ruling doesn’t change a thing. There would be obvious grounds for a court challenge under Initiative 1053. The measure defines raising taxes as “any action or combination of actions that increases state tax revenue deposited in any fund, budget or account, regardless of whether the revenues are deposited into the general fund.” In other words, the tax increase doesn’t have to be straightforward. And while there might be a dispute on whether an increase in the state liquor markup is a tax increase, Talmadge cites a raft of court rulings that indicate that indicate it doesn’t matter what the state calls it. If it walks like a duck and quacks like a duck, then it’s a duck.

            Once those arguments are won, the rest is simple, Talmadge said. The whole budget is invalid without a two-thirds vote.

            “It’s as if you pass a bill in the Senate with 20 votes and in the House with 40 votes, and somebody brings down a gavel and says the bill has passed,” Talmadge said.

            That sort of thing would be tossed out right quick. What exactly would happen next is unclear – an entire state budget hasn’t been overturned before.

            Ought to Take Two-Thirds Vote

             For his part, Tim Eyman, author of the initiative, says the move on liquor is a clear violation of the intent of I-1053. “This is an absolutely sleazy move to raise liquor taxes while piously claiming, ‘don’t blame us, the bureaucrats did it,’ ” he said. “That’s exactly why voters approved I-1053, to put the responsibility for raising taxes and fees in the hands of the Legislature.”

             Naturally there’s a financial interest at stake – that’s why the Distilled Spirits Council is raising the issue. The higher liquor prices go, the lower the sales. People might continue drinking, but they trade down to lower brands. When liquor prices went up in 2009, sales volume decreased by about 2 percent.

             The council isn’t threatening to blow up the budget in court – yet.

             But government relations director David Wojnar said, “We contend it is a tax increase, and it should be held to the same standard as any other tax, if the Legislature is so inclined to take it up. In fact, we think the Legislature should take it up for a two-thirds vote, to remove all doubt.”

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