With Democrats in the state House and Republicans in the Senate in general agreement about how much to spend on education, both now face a tougher climb in finding agreement in how to pay for it.
The Senate budget, while it generates some revenue by closing a dozen existing tax exemptions, seeks no new taxes. The House budget seeks $1.47 billion in new tax revenue over the biennium through a capital gains tax and an increase of the Business and Occupation services tax paid by professionals, such as physicians and lawyers.
The capital gains tax, which would apply to about 31,500 state residents, would levy a 5 percent tax on the capital gains on investment income above $25,000 for individuals and $50,000 for couples. The tax, which is 2 percentage points lower than Gov. Jay Inslee’s proposal, would exempt profits from retirement accounts and the sales of primary residences and would exempt agricultural and timber producers. It would generate about $550 million.
The B&O service tax increase would generate about $530 million. Democrats, would make a cut to the B&O tax, doubling the exemption of the tax for small businesses. Democrats also want to apply the sales tax to Internet sales, generating $85 million.
Sen. Andy Hill, R-Redmond, the Senate’s chief budget author, acknowledges that the state needs to start backfilling the cuts to education and social services and end a virtual freeze on teacher and state employee pay forced by the Great Recession. But Hill and other Republicans hold that economic growth, which is expected to bring in $3 billion in additional revenue, can provide the funding necessary to correct past cuts.
The question of whether the proposed tax increases are necessary comes down to how quickly those cuts should be resolved and basic fairness.
While the Senate budget does outline increases for programs and employees throughout its budget, there are reductions in funding requests elsewhere and a response that is too slow to improve pay and benefits for employees. Rather than include the funding for pay raises — 3 percent in July and 1.8 percent next year — already negotiated between the unions and Gov. Inslee, Republicans are offering flat $1,000 annual raises each of the next two years.
The Washington State Patrol provides a good example of what has happened to state employee pay. The patrol, which is struggling to fill 100 vacancies, pays starting troopers about $4,000 a month. An officer with the Everett Police Department can expect about $5,100 a month to start. A pay bump of $1,000 a year will not close that gap anytime soon.
As to fairness, our tax system is not. The state’s system relies heavily on revenue from sales tax and has repeatedly been criticized as the most regressive in the United States, most recently by the Institute of Taxation and Economic Policy in its “Who Pays?” report. Almost 17 percent of the income for the bottom 20 percent of non-elderly taxpayers, those making less than $21,000, goes to taxes. The middle 20 percent, those making between $40,000 and $65,000, pay a little more than 10 percent of their income. The top 1 percent, those making more than $500,700 a year — many who would pay that capital gains tax — pay about 2.4 percent in state taxes.
The tax increases proposed are fair and allow the state to begin making up for past losses to programs and employee compensation.
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