Property tax break, capital gains in Democrats’ budget

OLYMPIA – Washington residents would see their property taxes go down for two years from the state’s tax “windfall” and stay low if the Legislature approves a new capital gains tax, under the budget proposal released Tuesday by House Democrats.

The state would spend more money on public schools, although not the way the Supreme Court says it should, in the spending plan. It would also put more money into mental health programs, health care and financial aid for college students.

“We’re proud of this budget. We stand behind it,” House Appropriations Committee Chairman Timm Ormsby, D-Spokane, said.

Rep. Bruce Chandler, of Granger, the top Republican on that committee, said he was concerned the growth in state spending in the budget proposal was not sustainable. Instead the Legislature should be looking for more ways to spur economic growth in parts of the state that haven’t seen the economic boom, he said.

The House spending plan has some significant differences from the budget released Monday by Senate Democrats. They’ll have to make compromises to pass a single spending plan by March 8, the last day of the regular session, or go into an overtime special session.

Senate Democrats also want to use some of the extra tax revenue the state is expected to get this year to reduce property taxes, but only in 2019. House Democrats would use some of the money to drop the property tax twice, next year and in 2020.

To provide long-term property tax reductions, House Democrats are proposing a new capital gains tax for the state, which would start in 2020. Money from that new tax would come from about 48,000 residents, Finance Committee Chairman Kristine Lytton, D-Anacortes, said. It would be a 7 percent tax on the proceeds from certain investments totaling more than $25,000 per person or $50,000 per couple. There would be exemptions for certain gains, including the sale of a residence or assets in a retirement account.

House Democrats have proposed a capital gains tax in the past, but have not passed it out of the chamber. House Majority Leader Pat Sullivan, D-Covington, said it would be brought to the floor Friday along with the budget.

Lytton said the new tax would be “revenue neutral”, meaning the total property taxes collected in the state would be reduced by the amount of money the capital gains tax raised.

But Republicans are opposed to the tax, calling it a capital gains income tax that would lead to an overall income tax eventually.

“There is no state in the country that just has a capital gains tax without an income tax,” House Minority Leader Dan Kristiansen, R-Snohomish, said.

Lytton said House Democrats have checked with tax experts who concluded the proposal is an excise tax, not an income tax, because it’s on the voluntary sale of assets.

But Jason Mercier, of the Center for Government Reform, countered that is a tax based on gains reported for the federal income tax, and is taxing the income from the sale of assets. If the capital gains tax passes both chambers and is signed by Gov. Jay Inslee, the dispute over whether it is an income tax, which is restricted by the state Constitution, could prompt a lawsuit.

The Senate Democrats do not have a capital gains tax in the budget they proposed Monday, and the House Democrats’ budget does not require that tax to balance through the end of this budget cycle on June 30, 2019. It would require the money from the new tax to continue lowered property taxes in the next two-year budget cycle.

Property taxes went up throughout the state this year because of a change the Legislature made last year to raise the state levy and lower the amount local school districts can levy. But the state increase went into effect this year, and the school district levies won’t be released until next year.

Republican leaders Tuesday called for a larger property taxes break, and one that property owners would get this year. Property taxes already are scheduled to go down in 2019 based on the changes to state and local property tax systems approved by the Legislature last year, Sen. John Braun, R-Centralia, said.

“It’s ‘18 that’s really difficult for many, many homeowners,” he said.

Another major difference between the two budgets is the way they add money to the public school system. Senate Democrats want to add nearly $1 billion to the K-12 budget to pay for salary increases for teachers and other school staff, which would bring the state into compliance with a state Supreme Court order.

House Democrats want to add money for special education students, family involvement coordinators in elementary schools and guidance counselors in middle schools, extra money for teacher experience, and extra staff for schools facing delays in instituting smaller K-3 class sizes. Their education package totals $446 million in spending through mid-2021.

On that topic, they are more closely aligned with Republicans, who have argued against complying with the court’s ruling that teacher and staff salary increases must be fully implemented this fall on a schedule the Legislature set for itself.

Sullivan said that schedule was set in 2009, and last year lawmakers in both parties agreed it was more practical to spread the raises over two years. The House budget maintains that position, he said, adding “our focus was to help struggling students be successful.”

But the House budget would set aside $1 billion in an Education Legacy Trust Account to show the court the Legislature will make good on last year’s agreement to follow through on raises in 2019, he said.

It would also put $105 million into a Basic Education Account to cover the $100,000 per day contempt fines the court has ordered for failing to meet deadlines on adequately paying for public schools. It would then spend that money for some of the school improvements it is planning.