When Senate Democrats unveiled their initial version of the state’s 2020-21 budget in late March, they also presented a substitute Senate bill dubbed the “Fix Our Tax Code Plan” as a complement to the package.

The bill would’ve introduced a capital gains tax and used the resulting revenue to fund several specified tax-relief efforts. But, it didn’t see any action past an April 8 public hearing in the Senate Ways and Means Committee.

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The plan would’ve allocated $49 million in new revenue toward:

• funding the Working Families Tax Credit — a credit for people with low to moderate income that has gone unfunded and unimplemented since it was established in 2008;
• B&O tax relief for some small businesses;
• sales and use tax relief for certain goods, including diapers, feminine hygiene products, and durable medical equipment; and
• expanding property tax relief to senior citizens, people with disabilities, and veterans.

House Democrats, in contrast, proposed a capital gains tax as part of their original budget. Sen. Andy Billig, Senate Majority Leader and sponsor of the substitute “Fix Our Tax Code” bill, said the primary reason for separating the capital gains tax from the Senate budget proposal was its vulnerability to a challenge.

“I think some of the pushback that we heard was a concern about using capital gains for committed spending, because of the possibility that it could be challenged at the ballot and/or in the courts,” Billig said. “And so, it was a safer proposal to have the spending tied to other revenue sources and to look at this proposal as a way to make the tax code more fair.”

When asked at the Senate budget’s initial unveiling what would happen should the “Fix Our Tax Code Plan” not pass, Billig made clear that tax relief for senior citizens, people with disabilities, and veterans piece was also included in the base budget as what he called “a contingency plan.”

As foreshadowed, that target for tax relief was the only one from the plan that showed up in the final budget compromise.

While the “Fix Our Tax Code Plan” and other efforts to introduce a capital gains tax didn’t pass this session, several other bills impacting taxes did.

In the final days of session, the Legislature passed a handful of bills that made changes to Washington taxes, including a business and occupation tax increase for select businesses and a graduated real estate excise tax.

Sen. Joe Nguyen, who prime-sponsored the graduated-REET bill that passed — and also introduced a bill to impose “a tax on wealth inequality” late in session to “inject” a narrative around wealth inequality into budget discussions — says that the changes made shouldn’t be overlooked.

“Let’s not lose sight of the fact that we just, like, substantially altered the tax structure in Washington State to be a bit more equitable,” Nguyen said. “Not quite what we want, but we did do some very good things.

The progressives will say that wasn’t enough. The conservatives will say that was too much. And I’m saying that wasn’t enough, as well. But, I think we are now having that conversation in earnest: This is the first time where the Senate actually had a conversation and put out their own plan on capital gains. Before, it was a non-starter.”

And pushes for a capital gains tax, like the “Fix Our Tax Code Plan,” may have played a role in the bills that did pass. Nguyen credits the attention given to the potential capital gains tax as a reason the changes — including taxes on oil companies, big banks, and tobacco companies — came to fruition.

“Good or bad, I think it’s because most of the attention was on capital gains,” Nguyen said. “So, people were focused on that. Even though that didn’t pass, we passed a slew of other things. Including, by the way, ones that Republicans supported.”

Many of those bills, though — and the way they came to pass in the waning days of session — yielded criticism from the other side of the aisle.

In a press release, Senate Republican budget leader Sen. John Braun criticized the last-minute passage of tax bills and was specifically critical of the bill raising B&O tax rates for some businesses to fund college grants for eligible Washington students.

“It’s unbelievable that all of these tax increases are coming at a time when state government is already taking in a record amount of tax revenue, and that our colleges and universities need to pin their hopes for funding on a new tax bill, much less this one. It’s so badly designed that even the state revenue department is predicting difficulty with collection.”

Rep. Drew Stokesbary, ranking Republican on the House Appropriations Committee, said the following in a statement after the budget passed:

“The majority spent the entire session focused on an unpopular capital gains tax, only to pivot in the 11th hour and propose brand new taxes. Taxes that were rushed through the process, in the final three days of session, with absolutely no opportunity for meaningful review or comment from Republicans or the public. Washingtonians deserve more than partisan politics. They deserve a budget that represents the voices from every district.”

Braun, Stokesbary, Senate Minority Leader Mark Schoesler, Democrat Sen. Mark Mullet, and House Minority Leader J.T. Wilcox sent a letter to Gov. Jay Inslee in May requesting a veto on a bill that raised the B&O tax rate for specified banks with an annual net income of $1 billion or more in the previous year.

That bill, which Inslee signed into law on May 21, was introduced as a title-only bill, heard by the House Finance Committee for the first time on April 26, and passed the full Legislature on the last day of session two days later.

Going forward, a piece of the Senate’s capital-gains bill that lived on in the budget will go into effect: the reauthorization and expansion of a tax structure workgroup created in 2017.

The final budget allocates over $2 million over the biennium to the workgroup, which is tasked with building off of work done by prior workgroups, preparing a report of preliminary findings by the end of 2020, holding public meetings after the 2021 legislative session to present findings and alternatives to Washington’s current tax structure, and summarizing taxpayer and stakeholder feedback.

“We have the least fair tax code of all 50 states, and there is, actually, now, bipartisan interest in trying to address that,” Billig said. “I was really gratified this past year that, for the first time that I can remember, that the Republicans were really talking about tax fairness as well. They have different ideas on how to approach it, but I think a big first step is that the problem has been clearly identified and I believe there is a consensus in the Legislature that…a broken and unfair tax code is a problem that should be addressed for our state to be able to move forward.”

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