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December 27, 2016

Governor proposes $4.4 billion tax increase amid healthy tax collections

By: Eric Lohnes   Comments: 0
Gov. Jay Inslee
Gov. Jay Inslee rolled out his 2017-19 budget in two parts this week - K-12 education and over state spending - both relying on his $4 billion-plus in new taxes this two-year budget cycle and growing to $8 billion in the next.

The governor's budget included the following new and increased taxes:

  • A new 7.9 percent capital gains tax on high-income residents;
  • A new and untested carbon tax;
  • Closure of five tax preferences; and,
  • A 1 percent Business and Occupation tax increase for service-sector businesses.

Inslee's stated intention is to have the additional tax collections fund K-12 basic education, including teacher raises, and boost mental health funding among state other programs.

And, while the governor has proposed the taxes be earmarked for K-12 education, it is the legislative body that will have the final say both on any new or higher taxes and how tax dollars are allocated to various state programs and agencies.

And, it should also be noted that tax collections are already projected to grow by more than 6 percent this budget cycle and nearly 9 percent the next.

While the governor's plan is just the start of the negotiations that will take place over the 105-day legislative session between the House Democrats and the Republican-led Senate Majority Coalition, it's not a very palatable plan for employers and the taxes are the same ones rejected by voters at the ballot box.

In a statement issued Dec. 13, AWB President Kris Johnson, in part, said, “Washington employers appreciate the pressures on the state budget – and they share the goal of complying with the requirements of the McCleary decision – but any plan for funding education should also consider the impact it will have on Washington’s business competitiveness and the economy."

In fact, the Legislature has made historic investments in K-12 education since 2013 - $4.5 billion - after years of one-party control that funded everything but education first.

And, his plan does not take into consideration that most of the state is still waiting for the economic recovery that Seattle has experienced.

“The uneven economy has left many Washingtonians behind the booming Seattle job market. The tax proposals in the governor’s education plan would further erode the state’s ability to protect and preserve good-paying jobs," Johnson said.

Here's how the taxes hurt employers and the state's economic competitiveness:

  • B&O: By expanding the B&O tax on services, this proposal would hit rural areas particularly hard, as service industries are among the few bright spots in many small towns.

  • Carbon tax: The carbon tax proposal in the governor’s plan would be a second blow to the state’s manufacturers, a sector that supports good-paying family-wage jobs, but is already dealing with the impacts of the governor’s recently unveiled carbon rule.

  • Capital gains: The governor’s proposed capital gains tax purports to target the wealthy, but we know from others states’ experience that it’s a volatile source of revenue and adopting one here would remove one of Washington’s competitive advantages.

  • Incentives: The governor’s proposal to remove tax incentives is not new. Many of these ideas have been previously offered and rejected by lawmakers and the public. Taxing bottled water, out-of-state shoppers who support Washington businesses and auto trade-ins will hurt middle-class families and small businesses.
Everyone understands the intense pressures from stakeholders, advocacy groups and fulfilling the needs of those who use the state's lifeline services, but the cumulative impact these tax proposals - combined with other rising costs such as new water quality standards, a carbon rule on employers, increasing minimum wage and more - makes it difficult to compete in a global market.

For more information on the governor's budget and other tax and fiscal issues, contact me at 360.943.1600.

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