In Support of the House’s Revenue Proposals

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In Support of the House’s Revenue Proposals

March 31, 2015

Senior Fiscal Analyst Andy Nicholas testified this morning in support of the House Revenue Package, HB 2224. Here’s why the Budget & Policy Center supports this common-sense bill:

House Bill 2224 is essential to ensuring the future prosperity of Washington state. By equitably and responsibly raising about $1.5 billion in new resources in the coming two-year budget cycle, the measure makes important investments in schools, health care, and other important priorities.

Attempting to fully fund basic education without the new resources included in HB 2224 would be deeply irresponsible. Such an approach would result in devastating cuts to higher education, health care, public safety, and other investments that create jobs, improve Washingtonians’ health and well-being, and help build a strong state economy.

The new revenue resources would come from capital gains tax, the closure of wasteful tax breaks, the implementation of the Washington State Market Place Fairness Act, and a Business and Occupation (B&O) tax surcharge. The benefits of each are as follows:

Capital gains tax:

House leaders wisely followed Governor Inslee’s lead by including a new tax on high-end capital gains, or profits from the sale of corporate stocks and other financial assets. The tax would be:

  • An equitable source of revenue: Only 1.7 percent of households in Washington state would pay any additional taxes under this proposal – almost exclusively those at the very top of the income scale.
  • A tool to help build a more sustainable tax system: Adding a rapidly growing component to Washington’s revenue mix would help create a more stable and dependable state tax system in the long run. Claims that the tax would be too volatile are overblown.
  • Good for our state economy: The investments in schools and higher education that would be funded by the capital gains tax are crucial to Washingtonians’ long-term economic success. There is no credible evidence that the tax would cause rich Washingtonians to leave the state or that it would discourage wealthy families living in other states from moving here.

Closing wasteful tax breaks:

Investing in programs that help create jobs would be much better for our state economy than wasting resources on failed tax breaks. House Bill 2224 would generate $300 million per biennium by eliminating seven wasteful tax breaks including those for prescription drug wholesalers, oil refineries, travel agents, software royalties, bottled water, non-resident shoppers, and banks.

Washington State Market Place Fairness Act:

Due to federal law, large out-of-state internet retailers have a huge advantage over small “brick and mortar” retailers located in Washington state: They don’t have to charge sales taxes on Washingtonians’ purchases. The Washington State Market Place Fairness Act is a bold proposal that would require the large multi-state businesses that have agreements with Washington state businesses to collect and remit state and local sales taxes to the Washington State Department of Revenue. This allows Washington state to:

  • Take action where congress has failed: Congress has repeatedly failed to clarify federal law and allow states to require multi-state businesses to collect sales taxes. This act gives us the opportunity to make progress here in Washington state despite the deadlock at the national level.
  • Create a level playing field: Continuing to allow and eBay to avoid collecting sales taxes is unfair to small businesses located in Washington state that do have to collect them. Requiring out-of-state e-retailers to collect sales taxes on purchases made by Washingtonians would help small businesses have a better chance to compete.

Reinstate a B&O tax surcharge and reducing taxes for small businesses: 

During the Great Recession, policymakers adopted a temporary 0.3 percentage point increase in the B&O tax rate paid by businesses in the service industry, which expired in 2013. Reinstating that surcharge now would generate $530 million in new resources in the coming budget cycle to help fund schools and other important priorities. It is important to note that:

  • Taxes would be reduced for the smallest businesses in Washington state. This surcharge would be paired with an increase in the small business credit – to $1,800 – thus eliminating B&O taxes for any service-industry business with fewer than $100,000 per year in gross income. Businesses with up to $200,000 per year would benefit from the credit to some degree.
  • This surcharge would help bring the tax system more in line with the modern economy. For decades, consumers have been spending ever greater portions of their incomes on services like health care, cosmetic services, financial advice, and others. Increasing the B&O tax rate that applies to these services would help the tax system keep pace with the changing economy.

The bottom line is that these components of House Bill 2224 represent a smart, common-sense path to building a more prosperous state for all Washingtonians – and to creating a state where we all have the opportunity to make economic and social progress.

PI cover thumbnailFor further analysis on the need for increased revenue in Washington state, see the Revenue section of our new Progress Index. (Read the full Progress Index here.) And stay tuned to schmudget for more-detailed analysis on the budget and revenue proposals in the coming days.