Upcoming Conference | 2019 Re-Wire Policy Conference, Dec 10, 2019 Register

Tax changes in the House Democrats’ budget

Washington House Democrats’ 2019-21 Proposed Operating Budget includes $52.6 billion in spending, funded in-part by a new tax and changes to existing taxes.

Three budget-related bills introduced today that are included in the budget would provide new sources of revenue.


Capital Gains Tax

One bill lumps together two big changes: a new tax on capital gains and a graduated Real Estate Excise Tax (REET).

Rep. Gael Tarleton, who chairs the House Finance Committee, referred to the “capital gains tax” included in the bill as an “extraordinary profits tax.”

The 9.9 percent tax would apply to the sale of assets that generate $100,000 in profits for an individual or $200,000 for a married couple.

According to the House Democrats’ revenue overview, sales of retirement accounts, single-family residences, cattle, horses, breeding livestock, agricultural lands, timber, timberlands, and “certain qualifying small businesses” would be exempt from the tax.

Part of the case House Democrats are making for the tax is that it wouldn’t impact many Washingtonians.

“Of Washington’s 3.65 million taxpayers, only about 0.4% have high profits and would pay the tax,” the revenue overview reads. “That’s less than 14,000 households.”

The proposed tax would generate an estimated $780 million in the 2019-21 biennium and $1.9 billion in the 2021-23 biennium, all of which would go into the Education Legacy Trust Account (ELTA).

Funds in the ELTA can be used for “support of the common schools, and for expanding access to higher education through funding for new enrollments and financial aid, and other educational improvement efforts.”

“Because it is viewed, generally, as a fairly volatile source of revenue, we don’t put it into the critical, day-to-day needs of this budget,” Tarleton said.

The tax, Tarleton said, would go into effect in the second half of the biennium.

“We need time to set it up, because we do not have the systems in place in the Department of Revenue to implement it in the first year of the first biennium,” Tarleton said.

Some, like Jason Mercier of the Washington Policy Center, say that a capital gains tax is, undoubtedly, an income tax — the introduction of which would invite a legal challenge in a state where the Supreme Court has said that such a tax would require a vote to amend the constitution.

Graduated REET

Right now, Washingtonians pay a uniform 1.28 percent tax on the sale or transfer of real estate, regardless of whether the property is worth $10,000 or $10 million. Several bills aimed at graduating the tax have been introduced this session — including one requested by Gov. Jay Inslee, which Rep. Jake Fey said is no longer being considered.

The bill included in House Dems’ budget proposal would lower the tax for some and raise it for others, depending on the real estate’s value.

There are exceptions in the bill for certain types of property, like farmland and timberland, which would all remain subject to a uniform 1.28 percent REET.

Other than those exceptions, here’s what the future REET would look like:


Image: Washington House Democrats

Tarleton said the bill would give 80 percent of people selling their homes a tax cut, leave the rate the same for 18 percent of sellers, and increase the tax rate for 10 percent of sellers.

House Democrats expect this change to bring in $130.3 million in the next biennium and $190.6 million in 2021-23.

For the near future, two percent of proceeds from the REET would go into the Public Works Assistance account, a little over 4 percent would go into the ELTA, and the rest would go into the general fund.

Tax preferences repeal

HB 2157 gets rid of tax preferences for the sale of precious bullion (bulk precious metals) and for travel agents. It also makes it harder for people who live out-of-state to get their home state’s sales-tax rate in Washington.

Those changes are projected to yield $68.4 million in the next biennium, and $76.1 million in 2021-23.

It’s worth noting that the same bill also expands a property-tax exemption for senior citizens and reauthorizes and expands the tax structure work group that was created in the 2017-19 operating budget.

An increased B&O tax for certain businesses

Rep. Drew Hansen introduced a bill to create a “workforce education investment to train Washington students for Washington jobs” — an idea featured in a recent Seattle Times op-ed authored by Microsoft President Brad Smith, University of Washington President Ana Mari Cauce, and Washington State Board for Community and Technical Colleges Vice Chairman Wayne Martin.

The bill adds a surcharge to businesses “that rely heavily on workers with a post-secondary education,” like software engineers and nurses.

According to the revenue overview, it increases B&O tax for some of those business from 1.5 to 1.8 percent, and “large global technology companies” could have a rate up to 2.5 percent.

The bill is expected to generate $427.4 million in the 2019-21 biennium, and $613.1 million in 2021-23.

Those funds would go to a new “workforce education investment account.”

Expenditures from the account, under the bill, “may be used only for higher education programs, higher education operations, higher education compensation, and state-funded student aid programs.”

Image: Washington House Democrats

At the budget press conference today, Hansen said the bill would fully fund the state need grant, expand the Guided Pathways program that helps students navigate college, and increase salaries for “community college faculties in hard-to-hire occupations.”