House Majority Leader Pat Sullivan, D-Covington, talks to reporters March 25, at the Capitol in Olympia. The House Democrats unveiled a two-year state budget proposal Monday that seeks $1.4 billion in new revenue, including a new capital gains tax on the sale of high-value stocks and bonds. (Ted S. Warren / Associated Press)

House Majority Leader Pat Sullivan, D-Covington, talks to reporters March 25, at the Capitol in Olympia. The House Democrats unveiled a two-year state budget proposal Monday that seeks $1.4 billion in new revenue, including a new capital gains tax on the sale of high-value stocks and bonds. (Ted S. Warren / Associated Press)

Editorial: State tax proposals will boost revenue, fairness

A capital gains tax and other proposals could make the state’s regressive tax system more equitable.

By The Herald Editorial Board

As state lawmakers set to work on the two-year budget before them, along with debates regarding what must be funded and whether new or increased taxes should be passed, their discussions also need to consider the issue of basic tax fairness.

Democrats and Republicans are agreed that the latest revenue forecast from the state economist — $850 million more in revenue through July 2021 than was expected in the last report, which was already pretty encouraging — is good news.

Where the parties split is on whether that means the state has the revenue necessary to meet its promises and priorities; and whether the state does or doesn’t need to adopt new or increased taxes.

Three guesses on where the parties land on those questions, and the first two don’t count.

In recent conversations with the Herald Editorial Board:

Republicans, among them Sen. John Braun, R-Centralia, hold that the new forecast adds even more weight to the argument that the state is enjoying its most favorable economic climate this century and can easily balance the budget for the next four years without cuts to state services.

The good news in the revenue forecast “didn’t happen by accident,” Braun said, and he and Republicans don’t want to take a chance that new or increased taxes will mess with continued growth in the state’s economy.

Democrats, including Rep. Pat Sullivan, D-Convington, assert that — even considering the recent forecast — the state is facing major expenses as it honors its obligation in the McCleary lawsuit to increase state funding for K-12 education, including additional funding for special education and inequities in the state’s new school levy formula; and other priorities that were left on the back burner in recent years, including behavioral health, investments in early childhood education and higher education, and a health insurance program and salary increases for state workers.

“I don’t think the proposals that we’re funding here are an excess,” Rep. June Robinson, D-Everett, vice chairwoman of the House Appropriations Committee, told The Herald’s Jerry Cornfield. “They are basic functions of state government.”

House Democrats, in the budget and tax package they released last week, have proposed spending $56.2 billion for the biennium to fund those promises and priorities and adding $1.4 billion in additional revenue with proposed legislation for a capital gains tax and reforms to the state’s business and occupation tax and its real estate excise tax.

Beyond the revenue the House Democrats’ tax proposals would generate, there’s one more reason to advance them: basic tax fairness in Washington state, for residents and businesses.

As it has in recent years, Washington state again ranked at the bottom for tax fairness in the Institute on Taxation and Economic Policy’s most recent report, “Who Pays?” a state-by-state assessment of those tax systems. ITEP, a nonpartisan tax policy advocacy group, ranked Washington state at the very bottom, based on the percentage that the state’s lowest-income families pay in taxes against how little the state’s wealthiest families pay in taxes.

Families in the lowest 20 percent — those making less than $24,000 a year — pay about 17.8 percent of their income in taxes, while the top 1 percent — those making at least $545,900 or more a year — pay 3 percent of their income in taxes.

That disparity — giving Washington the dubious distinction of having the most regressive tax system in the nation — is the result of system that has no income tax and instead relies heavily on state and local sales taxes.

Three tax proposals that House Democrats hope to advance can begin to better balance the tax system while funding investments that will also pay off in improved outcomes for the state’s lower- and middle-income families.

The capital gains tax proposed in the House would levy a 9.9 percent tax on profits from the sales of stocks, bonds and other assets above $100,000 for individuals and $200,000 for couples filing jointly. Earnings from retirement accounts and sales of primary residences, farms and private businesses would be exempted. The tax would be paid by about 13,400 top earners in the state, some 1,000 of whom live in Snohomish County.

Democrats also have proposed reforms to the real estate excise tax that would actually decrease the tax paid on the sale of homes sold for less than $500,000 and would keep the tax rate unchanged for houses sold between $500,000 and $1.5 million. Homes sold for $1.5 million to $7 million would pay a 2 percent tax and those over $7 million would pay a 3 percent tax.

The B&O tax increase, a three-tenths of 1 percent increase to the rate for specific professional services, including doctors, lawyers, accountants and others — and an increase paid by the state’s leading tech firms, including Microsoft and Amazon — would go to the new Workforce Education Investment Account to increase enrollment at state colleges, expand the State Need Grants and support career-connected learning, all areas from which those fields and industries draw their employees and have long benefited.

Although it might not convince Republicans to sign on, the House Democrats’ capital gains proposal is more modest than that proposed by the governor in his budget and proposed last year by Democrats, both of which would have applied a tax on profits above $25,000 for individuals and $50,000 for couples, which would have been collected from about 42,000 earners.

In the interest of even greater tax fairness, Democrats might consider a lower threshold than they’ve proposed — $50,000 for individuals and $100,000 for couples, for example — that could be used in part to step down the state’s sales tax rate.

Even if adopted and signed by the governor, a capital gains tax wouldn’t begin to bring in revenue to the state until mid-2020 at the earliest, assuming it doesn’t face a court challenge. Regardless, it should be adopted now.

Washington state has occupied the lowest rung of tax fairness in the nation for too long and must now make tax reforms that begin to address that inequity.

That it would raise revenue that could be used to improve the lot of lower-income and middle-income families in the state: all the better.

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