OLYMPIA – House Democrats opened hearings on their $3.5 billion tax package Monday with members of both parties contending serious budget negotiations can’t begin until the proposal passes the House.
But while the House Finance Committee is expected to vote on the package as early as Tuesday morning, Democratic leaders have said they don’t plan to bring it to the full House until budget negotiations are complete.
The difference in stances over this proposal for a significant change in state taxes makes it increasingly likely the Legislature will not pass a two-year budget in the 19 days left in the regular session, and will need a special session as it did in seven of the last eight years.
“We have a pretty upside down tax code,” Finance Committee Chairwoman Kristine Lytton, D-Anacortes, said as the hearing opened with more than 100 people signed up to explain why they support or oppose the proposal to change it.
The bill calls for a tax that would be new to Washington, a capital gains tax to be paid by individuals who have annual investment earnings more than $25,000 or couples who have more than $50,000. It would exempt gains on the sale of residential property and investments in retirement accounts, but not on the sale of commercial property.
That drew criticism from some business groups that said small business owners work for years to build up a company then sell it to fund their retirement. They’d have to pay the capital gains tax the year they sold the business.
Lytton and other House Democrats contend the capital gains tax is an excise tax. Republicans argue it’s an income tax, which is limited under the state constitution.
“You have to file an income tax return to test how much gain you have,” Senate Majority Leader Mark Schoesler, R-Ritzville, said at the weekly GOP press conference a few minutes after the hearing ended. “You can call it what you want but it still quacks like a duck.”
The tax package also rearranges the state’s real estate excise tax, cutting it for sales of homes below $250,000 and raising it for sales above $1 million. Lytton said that means about half of all sales would see a reduction.
Another section revises the business and occupation tax, exempting companies that have gross receipts below $250,000, allowing a deduction for those with gross receipts between $250,000 and $500,000, but raising it for businesses above that. It also significantly increases that tax rate for businesses that resell prescription drugs or manage international investments.
An estimated 80 percent of businesses would get some relief from the B&O tax, Lytton said. Overall, the tax package helps small businesses, working class and middle class families, she said.
Jim Dawson, of the Spokane Alliance, was among witnesses at the hearing that agreed with the tax proposals, saying the state should “make those who make more pay a little more.”
But most business groups were strongly opposed to at least parts of the package, arguing the capital gains tax is volatile, and the B&O tax was an unfair shift to those who are getting an increase and already have a high tax burden.
The 2017-19 operating budget that passed the House last Friday has about $44.9 billion in spending, compared to $43.3 billion in the Senate budget that passed a week earlier.
The two budgets also take a different approach to paying for public schools, which the Legislature is under a state Supreme Court order to reform.
Lytton said the Senate plan does have a tax increase with its shift of the property tax system that gives a break to many school districts but increases taxes in Seattle and some other Puget Sound districts.
Rep. J.T. Wilcox, R-Yelm, defended that as a way to “offset local taxes that are particularly burdensome in the poorest parts of the state.”
Because of the differences in the two spending plans, and the contention by Republicans that the House Democratic tax package couldn’t pass the full House, little negotiations are taking place on a compromise budget.
“There’ve been conversations, but negotiations are very, very difficult,” Schoesler said.
Negotiations are also difficult because both budget committees have scheduled marathon hearings in an effort to approve bills before Tuesday’s deadline for legislation.