Schmudget Blog

Governor Proposes Bold Plan to Invest in Kids, Clean Up Tax Code

Posted by Kelli Smith at Dec 13, 2016 07:45 PM |

By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst
 
Great public schools are not only the key to providing Washington’s kids with an opportunity for a bright future; they are also the foundations of a prosperous state. Governor Inslee’s revenue proposal offers a clear vision of how to fulfill the Supreme Court’s McCleary school funding mandate in a way that builds solid economic groundwork for generations to come.

Inslee’s bold proposal would boost investments in schools by $3.9 billion in the coming 2017-2019 state budget. This proposal makes the right choice: to prioritize investing in Washington’s children now in order to strengthen our state’s communities and economy in the future.

Investing in Great Schools 

With regard to K-12 public schools, the proposal would not only finish the job on McCleary, but it would also make additional investments in creating world-class schools. For example, his plan aims to:

  • Invest in educators ($2.7 billion): The governor’s budget includes funding to provide competitive wages to recruit and retain teachers, administrators, and classified staff – which is the most significant item that remains to be funded under McCleary. The plan will bring beginning teacher and staff pay up over the next two school years. It creates a new salary allocation model that will compensate teachers and staff not just for years of experience and degrees earned, but also for meeting professional development goals. The budget also seeks to provide teachers with opportunities for training, mentoring, and career advancement as well as with improved health benefits. Further, it will invest in training opportunities to recruit more teachers who represent communities that are often underrepresented, in particular bilingual teachers.
  • Close the opportunity gap ($867 million): The governor’s proposal would take steps to ensure all kids have equal opportunities to thrive, including nearly half a billion dollars to staff new, smaller kindergarten through third-grade classrooms. Plus it includes targeted investments in social and emotional health supports for students, a learning assistance program that helps struggling students from families with low incomes, and individualized support for foster care youth. 

Making Progress Toward Cleaning Up the Tax Code 

To generate the additional resources needed to build a brighter future for all Washingtonians, Inslee proposes important steps toward cleaning up and rebalancing the state’s upside-down tax code – a tax code in which the people with the lowest incomes pay seven times more in taxes as a share of personal income than the richest 1 percent. These steps include:

  • Enacting a tax on high-end capital gains ($821 million): Capital gains, which are profits from the sale of corporate stocks and bonds and other financial assets, would be subject to a 7.9 percent tax. The first $25,000 ($50,000 for a married couple) in capital gains would be exempt from taxation. As we’ve written about extensively, capital gains are more heavily concentrated among the very richest households – which means the tax would almost exclusively affect only the richest 2 percent of Washingtonians. 
  • Eliminating six wasteful tax breaks ($320 million): The proposal would eliminate a sales tax exemption for cars valued at more than $10,000 when traded in to a dealership. (Only the portion valued at more than $10,000 would be subject to the tax.) A Real Estate Excise Tax exemption claimed by banks on properties sold at foreclosure would be eliminated. The sales tax would be extended to purchases of bottled water. (Bottled water sold to people who do not have access to potable water would remain exempt.) A sales tax exemption claimed by Oregonians and residents of other states or countries with low (or no) sales tax would be converted to a refund program in which individuals would have to apply for the exemption. A sales tax exemption claimed by oil refineries on fuel used to power their operations would be repealed. The business and occupation (B&O) tax would be applied to certain out-of-state retailers that avoid collecting sales taxes by exploiting a loophole in federal law. 
  • Resetting business tax rates on personal and professional services ($2.3 billion): In the mid-1990s, personal and professional services – such as cosmetic services, financial advice, music instruction, attorney services, and business consulting – were subject to a B&O tax rate of 2.5 percent. Policymakers have since reduced the rate to 1.5 percent, although it was briefly boosted to 1.8 percent during the Recession. Inslee would restore the rate to 2.5 percent, but would expand a tax credit for small businesses and raise the minimum amount of business income required to file B&O taxes to $100,000 per year. 
  • Enacting a new tax on carbon pollution ($1.1 billion): Carbon emissions – the major cause of global warming – from fossil fuel distributors and refineries, power companies, and energy intensive manufacturers would be subject to a new $25 per ton tax. About half of the revenue would be dedicated to schools; the other half would go to investments in clean energy, water infrastructure, transportation, and efforts to reduce costs to businesses and households with lower incomes.
  • Reducing property taxes for three-fourths of households and businesses statewide: About $250 million of the additional state tax resources from other parts of the governor’s proposal would be used to reduce local school district property taxes. Under the plan, residents living in 119 school districts (those with significant local property tax levies) would see their property taxes reduced. Even with these reductions, all school districts would receive significant overall increases in education funding. 

What Else Needs to Be Done 

While Inslee’s revenue reforms would make a dramatic step toward a better future for all Washingtonians, the governor and policymakers should also consider the following reforms to make even greater progress toward a more fair and sustainable state tax code: 

  • Create a more equitable and adequate property tax system: A law that arbitrarily restricts property tax revenue growth to 1 percent per year must be eliminated. In the current year, the result of this law is that more than $1.6 billion in resources that would otherwise be used to fund schools is being left on the table. The governor and policymakers should also consider a long overdue increase in the state property tax levy paired with new rebates to offset costs for middle- and lower-income homeowners and renters.
  • Fund the Working Families Tax Rebate (WFTR): Fully funding the WFTR, a Washington state version of the federal Earned Income Tax Credit, would reduce taxes for more than 400,000 hardworking families in Washington state. Doing so would also help alleviate the higher fuel and energy bills these households would experience under the proposed carbon tax. 
  • Apply a higher rate to the capital gains tax: Given the many investments needed to create a just and prosperous state, policymakers should consider generating more resources from the capital gains tax. Applying a rate of 9.9 percent – the highest rate applied to capital gains in Oregon – or higher would generate hundreds of millions of dollars in additional resources for schools and other priorities. 

We applaud the governor’s investments toward creating excellent schools that benefit our kids and thereby strengthen the future of our state for all of us. This proposal makes the kind of investments necessary to ensure that our kids are taught by qualified and engaged educators and that kids who need the most help have access to supports in and out of the classroom. The plan also prioritizes thriving communities by cleaning up the tax code and getting rid of wasteful tax breaks. When we invest in the foundations that benefit us all, we can help to create a better Washington.

Stay tuned for additional analysis about how the governor’s budget proposal as a whole would impact our communities. 

 
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