Washington Democrats cast their budget bet on a capital gains tax

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Washington Democrats are dreaming big in their dueling budget proposals which hinge on passing a contentious capital gains tax this session.

Released on Thursday, Senate Democrats’ two-year budget would total $58.9 billion, driving up operating expenses by 15% when including federal funds. That number exceeds even Gov. Jay Inslee’s proposed $57.6 billion budget by more than a billion dollars and devote more money to a list of liberal dream projects.

“Everywhere you look in this budget, we have seized the opportunity to build a stronger, more equitable state,” said state Sen. Christine Rolfes, the Democratic chair of the Senate Ways and Means Committee. “This is an ambitious set of priorities that will guide a sustainable recovery.”

Those set of priorities include $1 billion for reopening schools and addressing student learning loss, $850 million in federal funds for affordable housing and homelessness, $450 million in state and federal funds for early learning and child care, and $125 million to fund state efforts to map and thin state forestland.

A series of new state projects are also set to see state and federal funds. The Immigrant Relief Fund, created last year for migrant workers hit hard by the pandemic, would see $268 million. Another $26 million would pay for the Office in Internal Investigations to review cases of deadly force by law enforcement.

Some of the biggest bipartisan provisions in Senate Democrats’ proposed budget is a $6.2 billion capital projects package, the largest in state history. It includes $490 million to get broadband internet to rural and underserved regions. About $390 million of that money would be paid for with federal dollars from the $7 billion in federal stimulus passed by Congress this month.

“Everything from e-commerce and education to telemedicine and precision farming has come to rely on equitable access to broadband,” said state Sen. Jim Honeyford, R-Sunnyside, the Capital Budget Committee’s top Republican member. “This budget takes extraordinary steps to make funds available to address this problem head-on.”

A few missing items from the Senate Democrats’ budget include taxes on soda and other sugary drinks which died early in the session, and one backed by Inslee in December aimed at health care premiums.

Coming from the more conservative of the state legislature’s two chambers, the Senate Democrats’ budget proposal is a big change of face for the body, which passed the capital gains tax introduced by state Sen. June Robinson, D-Everett, by a single vote this month. It would tax capital gains on stocks, bonds, and other assets excluding retirement accounts in excess of $250,000 at a rate of 7%.

The two-year proposed budget from House Democrats, released on Friday, totals $58 billion. The proposal, which mirrors Senate Democrats’ wishlist, would fund five extra school days next year and set aside more than $1 billion to cover the $1.3 billion in back rent the state Department of Commerce estimates is owed statewide. Washington’s current eviction moratorium was extended last week by Inslee through June 30.

Both Democratic budgets ride on the $350 million in annual revenue Robinson’s capital gains tax is expected to generate starting in 2022. The two plans would have the state draw on its rainy day funds until the tax’s enactment.

The tax, which is expected to find its way to Inslee’s desk the session, flies in the face of criticisms on the right regarding its constitutionality and impact on the state economy. Its support on the left stems from growing calls for progressive tax reform easing the sales tax burden on low-income households and offsetting costs onto Washington’s wealthiest.

“To imply that anyone other than a small handful of me and my super-wealthy friends would pay this is a disingenuous scare tactic,” Seattle venture capitalist Nick Hanauer said.

State Sen. Lynda Wilson, R-Vancouver, the top Republican on the Ways and Means Committee, shared the opinion that the capital gains tax is as pointless as it is and unlikely to survive the courts.

“The bad news is how this budget is tied to a tax proposal that is unnecessary, considering the amount of revenue already available as well as unconstitutional,” Wilson said. “Yet the Democrats have chosen to hitch their budget to a revenue source that is even less reliable, a capital gains income tax which has a 50-50 chance of being found constitutional, and that’s only if SB 5096 reaches the state Supreme Court.”

The latest state forecast has virtually plugged the budget hole Washington was staring down just a few months ago. As the state sits on $1.8 billion in cash reserves, Republicans argue that keeping the state’s balance sheets in the black is no longer a valid defense in capital gains tax proponents’ playbook.

The two budget proposals released by House and Senate Republicans this week would spend some $55 billion over the next two years and gut the state business and occupation tax for manufacturers. A new tax on legal services would recoup the estimated $600 million in revenue shortfall, according to their plans, and coincide with a 10% cut across the board to state agency headquarters.

Inslee has railed against the prospect of an austerity budget alongside his fellow Democrats since late last year. With a 57-41 majority in the House and a 28-21 majority in the Senate, the governor’s party likely stands to get its way this session in lieu of a political shift.

The Washington Legislature, now on its last legs, is set to adjourn on April 25.

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