Lawmakers wrestling over final $200 million

OLYMPIA – Much of this year’s legislative time has been devoted to a $2.8 billion hole in the state’s operating budget, but the special session is essentially locked up over less than 10 percent of that: about $200 million.

Democrats in the House and Senate are at loggerheads over who should pay that amount in taxes over the next 15 months: businesses, homebuyers and out-of-staters, or shoppers. Different parts of the state, particularly communities close to the border such as Spokane and Vancouver, and different segments of the economy will feel the tax bite harder, depending on which plan wins.

With no Republican in either house willing to vote for a tax increase, the Senate has a bare majority of Democratic votes for a plan that raises taxes overall by about $800 million, pulling in about a fourth of that from a temporary two-tenths of 1 percent increase in the state sales tax.

Senate Majority Leader Lisa Brown, D-Spokane, has consistently argued that’s the fairest way to spread the cost of state services, and while the sales tax falls hardest on the poor, the Senate proposal also offers a “working families” tax credit to soften the blow.

The House and Gov. Chris Gregoire generally agree with the Senate on how to raise about $600 million in taxes but oppose a sales tax increase. Gregoire hasn’t publicly threatened to veto a budget that includes a sales tax but has said repeatedly she considers it a “job killer.”

Instead, Gregoire proposed and the House approved a menu of taxes on banks, software designers, out-of-state shoppers and aircraft owners, designed to raise as much as the Senate’s sales tax increase.

Based on Office of Financial Management estimates, the priciest item on the menu would raise $76 million by applying sales tax to specialized or custom software designed for a particular user or business. Right now, someone buying a standard software package like Microsoft Office pays a sales tax, but those contracting for customized software do not.

“That’s significant, although it could depend on how you measure what’s custom and what’s not,” Cleat Grumbly of Spokane’s Next IT, where as much as half the revenue could be subject to the sales tax.

Most other states don’t tax customized software, Grumbly said. The proposed tax probably wouldn’t be enough to cause Next IT to relocate, but he wonders about small software companies in Eastern Washington that compete for regional business with companies in North Idaho and typically operate on small margins. Some could go out of business or lay off workers; others could move across the border.

The menu would collect another $51 million from banks that make large numbers of home loans. It levies the state’s business and occupation tax on revenue from first mortgages after the bank earns more than $120 million a year on those loans. Marty Brown, Gregoire’s legislative director and incoming head of the Office of Financial Management, said language is being negotiated in an effort to exempt all community banks in the state, so the new tax would hit large national banks doing business in Washington.

The $120 million threshold is set too low for a few of the bigger Washington-based banks such as Sterling Savings, said David Brukardt, executive vice president of Sterling Financial Corp., which did more than $160 million in first mortgages. But even if Sterling received a full exemption, the company wouldn’t be in favor of adding the tax to its bigger competitors, which would likely pass it on to borrowers, he said.

“All of us are willing to pay our fair share, but this is not the year to add costs to the fragile housing market,” Brukardt said.

Another entrée on the House tax menu would end the sales tax exemption some out-of-state shoppers get at Washington stores. Residents of Oregon, Montana and Alberta can avoid the sales tax by showing a driver’s license when they shop at Washington stores; ending that practice could raise $41.5 million.

The state Revenue Department doesn’t track sales tax exemptions recorded in individual counties or cities, but the benefit would likely be felt most in Vancouver and other communities near Oregon. But Spokane also sees significant tax-free sales at certain times of the year, John Shasky of NorthTown Mall said.

“I don’t think it would be a big deal,” said Harry Sladich of the Spokane Convention and Visitors Bureau, because most out-of-state shoppers are making the trip for other reasons, too. “But the poor retail clerk is going to get hammered the first time (the shopper) is told.”

Under negotiation is a plan to turn the exemption into a rebate so that the shopper would pay the tax with the sale and apply for a refund after returning home. The state would wind up keeping some money, likely from smaller purchases that aren’t thought worth the trouble of filling out a form. But for a big ticket item, they’d probably file, Marty Brown said.

The governor’s proposal also calls for higher fees or taxes on private planes and business jets. It’s a ramped down version of an earlier House plan but still tries to raise $4 million through what Todd Woodard of the Spokane Airport Authority called a “very real threat” to airports on border communities.

“Aircraft are a very movable asset,” he said, and pilots at Spokane International or Felts Field could relocate to Coeur d’Alene or Sandpoint if the fees went up dramatically.