Details of Senate Revenue Proposal
The budget proposal introduced this morning in the State Senate includes a package of reasonable revenue increases that are needed to preserve basic public structures like health care, education, and other services that support working families. Overall, the Senate proposal would generate about $918 million in new resources this biennium by temporarily increasing the state sales tax rate by 0.3 percentage points, eliminating wasteful tax exemptions and loopholes, and raising the cigarette tax by one dollar per pack. The Senate’s proposal would also provide funding for the Working Families Tax Rebate (WFTR), a tax rebate program based on the federal Earned Income Tax Credit (EITC). Each of these elements is discussed more fully below.
While the Senate’s budget is an important step in the right direction, many vital services would still face deep cuts under the proposal. In fact, over the entire FY2009-11 biennium, revenue increases would account for only 10 percent of total budget-balancing actions.
Temporarily Increasing the Sales Tax
The Senate proposal would temporarily increase the state sales tax rate by 0.3 percentage points from 6.5 to 6.8 percent for three years. The increase would remain in effect until June 30, 2013 and would generate about $313 million in additional revenues this biennium. Under the proposal, all of these additional revenues would be dedicated to education programs, preserving state levy equalization, all-day kindergarten, and grants for higher education.
For more detail on using the sales tax to close the shortfall, see our analysis "Increasing and Modernizing the Sales Tax."
The Working Families Tax Rebate
The Senate proposal includes funding for the Working Families Tax Rebate (WFTR), a policy developed by the Budget & Policy Center which would offer help to lower- and middle-income residents – those hit hardest by the economy. The WFTR is based on the federal Earned Income Tax Credit, and would refund a portion of state sales taxes paid by lower-and moderate-income working families with children. The Senate proposal would fund the WFTR at five percent of the federal EITC in the current biennium and 10 percent of the credit in future years. For more information, click here to view a list of resources about the WFTR developed by the Budget & Policy Center.
Increasing the Cigarette Tax
Under the Senate proposal, the cigarette tax would be increased by one dollar per pack from $2.025 to 3.025 per pack, generating about $86 million this biennium. All of the additional revenues from this action would be dedicated to help fund the Basic Health Plan, which provides health insurance for low-income single workers who are not eligible for Medicaid. In the long-term, this action would encourage consumers to make healthier purchasing decisions and would lower health care costs.
Eliminating wasteful exemptions and loopholes
Finally, the Senate budget proposal would generate about $518 million in the current biennium by closing a number of wasteful tax loopholes and eliminating costly exemptions. The largest items in this category are detailed below.
Limiting preferences expanded by courts
A number of narrowly-targeted business tax exemptions were recently expanded as a result of State Supreme Court rulings. Notably, in the “Dot Foods case” the Court greatly expanded an exemption that was originally intended to apply only to door-to-door sales companies (Avon, Mary Kay, etc). Without action, the Court’s ruling will cost the state about $154 million in the current biennium. The Senate’s proposal includes language that will repeal and retroactively clarify this exemption.
Eliminating trade-in allowances
Under current law, the sales tax exemption for cars, trucks, boats, mobile homes, and other vehicles that are traded-in costs the state about $92 million in foregone revenues each year. The Senate proposal would eliminate this costly exemption.
Economic Nexus
Under current law, many companies are not required to pay Washington’s B&O tax even though they do a significant amount of business in the state. Economic nexus would provide a more reasonable standard of determining which businesses operating in Washington are liable for B&O taxes. The Senate budget would adopt economic nexus, generating about $73 million in the current biennium. For more information see the schmudget post “What is ‘Economic Nexus’ and Why Do I care.”
Limiting the first mortgage deduction
Originally, the B&O deduction on interest from first home mortgages was designed to assist Washington-based banks. There are no longer any major banks headquartered in Washington, however. And almost all mortgages are sold to out-of-state lenders. As a result, this deduction no longer serves its intended purpose. The Senate proposal would cap this deduction at $100 million, saving the state about $51 million in the current biennium.
Limiting the exemption on fertilizer
Fertilizer is currently exempt from the state sales tax. The Senate budget proposal would limit this exemption so that it applies only to organic fertilizers and sprays, saving the state about $25 million in the current biennium.
Repeal the preferential rate for sales of prescription drugs
Resellers of prescription drugs currently enjoy a preferential B&O tax rate of 0.138 percent, which is substantially lower rate than the 0.484 rate paid by other wholesalers. The Senate proposal would eliminate this preferential rate, saving the state about $12 million in the current biennium.
Addressing Tax Avoidance
The Senate proposal would impose greater restrictions on tax avoidance and would limit abusive tax avoidance transactions. This action would generate about $12 million in new resources in the current biennium.
Other actions
A number of smaller loopholes, exemptions, and preferential rates would be eliminated under the Senate budget proposal, generating about $59 million in the current biennium.
