Governor offers Realistic, Responsible Approach to State Budget
Updated January 15, 2015
By Kim Justice and Andy Nicholas
Governor Inslee proposes to invest in Washingtonians and our economy over the next two years through a healthy balance of revenue, cuts, fund shifts, and reserves (see graph). Over half of the budget solution (57 percent) would come from tax increases that will make our revenue system more equitable and sustainable over time – a much-needed response after years of deep budget cuts undermining progress for workers, families, businesses, and the economy.
A Budget that Invests in Washingtonians
While the Governor’s proposal does include some cuts, on balance it invests in the most important needs of our state, including:
- $2.3 billion in new investments in education from birth to career, including resources targeted to closing the opportunity gap;
- Increased space to treat people in need of mental health services;
- First wage increase for state workers in seven years;
- Increased funding for state parks; and
- Additional staff to respond to reports of child abuse or neglect.
New Revenue Plan Brings Greater Equity and Sustainability to the Budget
The Governor’s sustainable revenue plan would raise $1.4 billion during the upcoming two-year budget cycle. These new resources would be generated by:
- Adopting a new capital gains excise tax that would be paid by less than 1 percent of Washingtonians, almost exclusively those at the very top of the income scale. For more information see this “frequently asked questions” document about taxing capital gains;
- Closing ineffective tax breaks for nonresident shoppers, oil refineries, and other products and industries;
- Dedicating revenues from proposed efforts to reduce carbon pollution; and
- Increasing taxes on cigarettes and e-cigarettes.
The Governor also proposes to enact about $94 million per two-year budget cycle in new tax breaks, which will be examined in future schmudget posts. Details on each of these actions are included below.
The Governor’s proposal represents a realistic, responsible approach to meeting the educational needs of our children, keeping families safe and secure, and improving our economy. Lawmakers should take the Governor’s lead and raise new revenue. Doing otherwise would be impractical and irresponsible.
Appendix: Tax Action details.
Enacting a new 7 percent excise tax on high-end capital gains ($798 million): Capital gains are profits from the sale of financial assets, mostly corporate stocks and bonds. Similar to the Budget & Policy Center’s proposal, the Governor proposes to tax capital gains in excess of $50,000 per year for a married couple ($25,000 for singles). Less than one percent of Washingtonians have capital gains above this amount.
Dedicating revenues from proposed efforts to reduce carbon pollution ($508 million): A portion of proceeds from the sale of carbon allowances – part of the Governor’s proposals to reduce carbon pollution and address climate change – would be dedicated to education programs. Some of these revenues would also be used to fund the Working Families Tax Rebate (link), which is a Washington state version of the federal Earned Income Tax Credit that would reduce taxes for some 435,000 households from Aberdeen to Spokane.
Increasing the cigarette tax by 50-cents per pack ($38 million): The proposed change would increase the cigarette tax to $3.525 per pack from $3.025 per pack.
Enact a new excise tax on “e-cigarettes” and vapor products ($18.1 million): Under current law, e-cigarettes are subject to the general retail sales tax, but not the cigarette tax or the Other Tobacco Products (OTP) tax. The governor proposes to apply a new excise tax to e-cigarettes equal to 95 percent of their sales price; the same rate applied to cigars, pipe tobacco, and chewing tobacco..
Applying the sales tax to the trade-in value of cars worth over $10,000 ($105.3 million): Under current law, when a used car is traded-in as part of the purchase of new car, the value of trade in is exempt from the state sales tax. The governor proposes to apply the sales tax to trade-ins to the extent the trade-in value exceeds $10,000. The average value of a traded-in vehicle is $7,500 in Washington state, according to the Department of Revenue, meaning the majority of consumers would not be impacted by this change.
Repealing a use tax break for oil refineries ($51 million): A sales tax break originally intended for manufacturers and sawmills is now almost exclusively claimed by oil refineries (link). The governor proposes to eliminate the break for oil refineries but leave the tax break in place for sawmills.
Modifying a sales tax break for nonresident shoppers ($51.5 million): Under current law, residents of other states that have low or no state sales tax are exempt from Washington state’s sales tax (e.g., Oregon). The governor proposes to turn the exemption into an annual rebate program, in which. nonresident shoppers would be able to file for a refund if their total annual state sales tax payments are $25 or more.
Repeal the sales tax exemption on bottled water ($44 million): Until 2004, the state sales tax applied to purchases of bottled water. However, when policymakers enacted a law designed to harmonize Washington state’s sales tax with those in other states, bottled water became exempt. Since then, the agreement between states to harmonize their sales taxes – the Streamlined Sales and Use Tax Agreement (SSUTA) – has been modified to allow states to collect sales taxes on bottled water. Although, specifics are not yet available, it is likely the proposal would maintain the exemption for people that do not have access to potable water.
Repeal the preferential B&O tax rate on royalty payments ($44 million): As of 1998, royalty income – payments from licensing brand names, software, and other intangible property – are subject to a preferential business and occupation (B&O) tax rate of 0.484 percent. In 2010, as part of an effort to prohibit businesses from avoiding paying B&O taxes on royalties altogether, policymakers allowed businesses to pay the tax only on the portion of income that occurred in Washington state, rather than all of their royalty income, as had been the case previously. The governor proposes to continue to allow businesses to pay B&O taxes only on royalty income tied to Washington state, but to eliminate the preferential rate and tax royalties at the 1.5 percent rate paid by other finance-related businesses.