OLYMPIA — Majority Democrats in the state House said Tuesday they want to use swelling state reserves and proceeds from a capital gains tax to lower property tax rates starting next year.
But they are not cashing in on those surging revenues to ensure the state meets its school funding obligations by fall as required in the McCleary case, thus setting up a potential showdown with the Supreme Court.
“But our focus has got to be on the 1.1 million school children who are in the system right now and who can’t wait for the services that we are providing” in this budget, he said. “Our focus was to help struggling students be successful and we’re not going to waver from that.”
The House Democrats’ approach on McCleary puts them at odds with majority Democrats in the Senate. They released their budget Monday and it spends the money needed to get the state in compliance and out of contempt with the court.
But there is a common desire to lower property taxes. While the Senate plan does it one time, in 2019, the House seeks to bring it down in 2019 and 2020, and even longer if a capital gains tax is enacted.
“We’re proud of our budget,” said Rep. Timm Ormsby, D-Spokane, chairman of the House Appropriations Committee and the lead budget writer. “We fully expect to reconcile our differences.”
“While we approach some of our state’s challenges in different ways, I’m confident we can work together in the next few weeks to deliver a balanced budget on time that will result in healthier families, safer communities and an economy that works for everyone across the state,” said Sen. Christine Rolfes, D-Bainbridge Island, chairwoman of the Senate Ways and Means Committee.
The proposed House budget contains $634 million in new spending on top of the two-year $43.7 billion budget passed in June.
It pours roughly $180 million into improvements at the state’s two psychiatric hospitals, investments in community mental health services, and compliance with federal court decrees regarding evaluation and treatment for people accused of crimes.
There also is money for expanding on several fronts the state’s response to the crisis of opioid abuse. It includes $500,000 to Snohomish County for a 40-bed residential criminal justice diversion center pilot project at the former work release site in Everett, an undertaking aimed at better addressing street-level drug addiction and mental illness
There’s $141 million for programs in elementary and secondary education. Districts would receive more dollars for each special education student plus additional money to hire middle school guidance counselors and family involvement coordinators.
Although the House budget does not pencil in money to comply fully with McCleary, it does set aside $105.2 million to cover penalties accruing since August 2015 when the Supreme Court found the Legislature in contempt for not meeting its milestones in the case. Per the court’s order, those dollars will be put into public schools.
And Democrats also transfer $1.1 billion from the state general fund into the Education Legacy Trust Account to be spent in the 2019-21 biennium on educator salaries. Doing it this way would bring the state into compliance one school year later than desired by the Supreme Court but right on time with the deal a bipartisan group of lawmakers hammered out in a marathon 2017 session.
“We came to the conclusion that phasing in salaries over a two-year period was the best approach to take,” Sullivan said. Setting aside the large sum should demonstrate to the court their commitment to act, he said.
To cover the additional spending, House Democrats rely on the nearly $1.3 billion more in revenue the state expects in the next three years, compared to earlier forecasts.
Much of it will go into the state’s restricted reserves, known as the “rainy day” fund. Under state law, at least 60 percent of members of the House and the Senate must vote to spend money from the account.
House Democrats want to extract nearly $1 billion from the fund in the next three years to roll back some of the tax rate increase approved in 2017.
Lawmakers and Gov. Jay Inslee hiked the statewide tax rate by 81 cents to $2.70 per $1,000 assessed value. It marked the single-largest hike in state history and is a contributing factor to the startling increases homeowners are finding on their tax bills this month.
House Democrats want to reduce the rate in 2019 to $2.37 per $1,000 of assessed value, and in 2020 down to $2.30 per $1,000 of assessed value.
To keep it from rising again, House Democrats are proposing to enact a capital gains tax. They contend this would create a new stream of revenue to offset what would be generated from boosting the property tax rate back to its current level. Their plan is to start imposing it in 2020 and expect to raise enough to actually push the tax rate down to $2.20 in 2021.
Rep. Kristine Lytton, D-Anacortes, chairwoman of the House Finance Committee, said 48,000 people would pay the capital gains tax and thousands of homeowners would reap the benefit.
“We’re hearing more and more that people are more amenable to swapping out one tax for another,” she said.
Republicans strongly oppose the tax, saying it’s a precursor to getting a statewide income tax.
“We have a tax system providing way more money than we need,” said Rep. J.T. Wilcox, R-Yelm, House minority floor leader. “I don’t believe we need to talk about taking money away from Person A to give to Person B.”
Rep. Bruce Chandler, R-Granger, the ranking Republican on the House Appropriations Committee, issued a statement saying the revenue windfall enables the state to help those who are most vulnerable. But he cautioned against spending too much too fast.
“We know that these robust economic times will not last forever, and indeed, have not actually occurred in all areas outside Seattle,” he said. “We must avoid the temptation to spend every last dollar the taxpayers have entrusted to us. Instead, I would like to see some of these extraordinary revenues used to ensure that this robust economy lasts longer and spreads to every corner of the state.”
The House and Senate budgets are expected to be voted on this week then more formal negotiations would begin between the two chambers.
The legislative session is scheduled to end March 8.