Editorial: Lawmakers puzzle over taxes, cuts and consequences

By The Herald Editorial Board

Give Democrats in the state Legislature credit for seeking to turn crisis into opportunity; by proposing a slate of tax changes and increases that in addition to avoiding substantial cuts in order to backfill an estimated $16 billion budget gap over the coming four years, at the same time looked to bring more fairness to the state’s tax system.

Then credit Republicans in Olympia and Democratic Gov. Bob Ferguson and state Treasurer Mike Pellicciotti for urging restraint as lawmakers over the next three weeks work to hammer out a budget for the next two fiscal years.

Among the tax proposals offered by Democrats in the Senate and House:

A wealth tax that would collect $8 (House proposal) or $10 (Senate proposal) on every $1,000 for those with more than $50 million in stocks, bonds and similar assets, and paid by about 4,300 of the state’s wealthiest residents. The tax was estimated to bring in about $4 billion a year starting in the 2027 fiscal year, earmarking those funds for public schools.

A payroll tax, paid by large employers, that would levy 5 percent of annual salary above the Social Security threshold — currently $176,100 — paid by companies with total payrolls of $7 million or more, effecting nearly 5,300 companies. It’s estimated to raise about $2.3 billion each year and allocated to schools and health care.

A 1 percent, across-the-board addition to the state’s business and occupation tax.

Removal of the 1 percent cap on property taxes for state schools, cities and counties, with an increase tied to population growth and the rate of inflation. Cities and counties would have the option to accept or decline that revenue increase.

Repeal of about 20 tax exemptions.

And, in the Senate, a proposal to reduce the state’s portion of the sales tax to 6 percent from the current 6.5 percent.

Meanwhile, Republicans in both chambers have urged no increases to state taxes, but have encouraged other cost-saving measures, including seeking to reopen contract negotiations with state employees by offering a $5,000 bonus to each.

Earlier this week, however, Gov. Bob Ferguson, raised objections to the wealth tax specifically. Even as he advised against an all-cuts budget as Republicans propose, he said he couldn’t support the level of taxes sought by Democrats in each chamber.

Ferguson, during a news conference, warned the proposed wealth tax was untested and would likely face legal challenges and “the real possibility of being overturned.”

The governor’s one caveat was that he might consider allowing the proposal to be tested at a far lower level — perhaps $100 million annually — to judge the reaction of public and courts.

Democratic lawmakers, if not thrilled with the yield sign thrown up by the governor, seemed to take it seriously.

“We heard the governor loud and clear,” said Sen. June Robinson, D-Everett, the Senate’s chief budget author and chair of its ways and means committee. “At this point we’re looking at other revenue options. We’re obviously mindful that we’re going to have to decrease our spending from the levels that we both came out of chambers with.”

The problem for Democrats is that much of what was planned in resolving the budget puzzle counted on some of the specific revenue solutions they proposed. Among the moving parts that could be lost is the sales tax reduction, which could do some heavy lifting in reducing the regressive nature of the state’s package of taxes, which disproportionately hit lower-income families as they pay a larger share of taxes as a portion of their income than wealthier residents.

At the same time, Senate Democrats’ plan to tap into the state’s rainy day fund to help balance the budget in the short-term, counted on that new revenue to replenish the reserves in 2027.

State Treasurer Mike Pellicciotti earlier had urged lawmakers to leave ample funds — at least 10 percent of state revenues — in reserve, especially with the potential threat by the Trump administration to withhold federal funds and the general economic stress looming from the impact of new tariffs for a state that is heavily reliant on international trade.

Others have raised real-world concerns about many of the tax proposals, including the Washington Roundtable, representing many of the state’s largest employers.

The Roundtable, in previous years, has encouraged major investments by the state in education and transportation as vital to Washington’s economic vitality, but now worries that several of the taxes being discussed could throw a wrench in those works.

The Roundtable, in a letter to the governor and legislative leaders, held that proposed tax increases were unnecessary and harmful to the economy.

“Given national economic trends, Washington state cannot sustain continued tax and spending increases and simultaneously maintain our economic resilience and competitiveness,” the letter stated.

Steve Mullin and Neil Strege, president and vice president of the Roundtable, said the wealth, payroll and B&O tax increases could chase jobs and businesses out of the state if implemented. The jobs that Seattle lost to Bellevue when it instituted a payroll tax, Strege said, could in turn leave Washington, if those taxes are implemented statewide.

Yet others see the wealth tax as a fair way to balance the state’s regressive taxes, among them Jacob Vigdor, a University of Washington economics professor. While better known for more conservative affiliations, Vigdor defended the legislation for the wealth tax during a March 31 public hearing before the Senate Ways and Means committee.

Vigdor, noting that the state ranks 48th in terms of the state and local tax burden imposed on citizens, pointed out that per capita income between 2010 and 2022 increased 47 percent faster than inflation in the state, while per capita funding for higher education fell 6 percent.

“We don’t make this request lightly, and we wish to focus our request on those Washingtonians who we feel are best positioned to afford to balance this budget,” he said speaking on behalf of a faculty council in support of the tax and calling it a strongly progressive revenue source. He urged lawmakers to “preserve opportunity rather than scale back opportunity.”

Washington state is one of eight states in the nation that doesn’t use a state income tax for revenue, instead relying on sales, property and other taxes, which contributes to the regressive nature of the state’s package of taxes.

Rep. April Berg, D-Mill Creek, chair of the House Finance committee, said Democratic lawmakers would continue to look for structural reforms to the tax code as part of a budget solution.

“We are not where we need to be in terms of having a tech heavy economy and tax policies that meet the needs of Washingtonians,” she said.

Over the next three weeks, count on discussions among lawmakers and the governor’s office to continue looking for opportunity amid crisis.

“Gov. Ferguson acknowledged that to go much deeper on cuts, it’s going to be really harmful and challenging,” Robinson said. “We need to decrease the spending in our budget; there’s no doubt about that. But we are still looking for balance between reductions and revenue.”