Gov. Inslee proposes major spending boost, new capital gains tax

OLYMPIA – Gov. Jay Inslee will ask the Legislature for an extra $9.7 billion in spending in the state’s main budget over the next two years to pay for improvements to public schools and the mental health system, higher teacher and state worker salaries and environmental protections that would help save threatened salmon and orcas.

He called it “a deliberate plan to make our future even brighter than our past.”

Although state revenues are expected to rise over the next two years, it wouldn’t be enough for everything he proposes. He’ll ask for higher taxes, including a capital gains tax on investment profits above a certain level and an increase in the business and occupation tax for service businesses such as law and accounting firms.

Reaction from key legislators was mixed.

House Appropriations Chairman Timm Ormsby, D-Spokane, called it a good starting point for upcoming budget discussions. “His focus on behavioral health, higher education and the environment are issues both House and Senate Democrats have championed for years,” he said in a news release.

Sen. John Braun, of Centralia, the lead Republican on the Senate Ways and Means Committee, called it “an extreme spending spree” and urged legislators to work with the billions more in tax revenue already expected to be collected to address schools, higher education and salaries.

“The plan he presented today is not a serious proposal that deals with the realities of crafting and passing a budget,” Braun said in a news release.

The state’s current two-year general operating budget – which covers most state programs and salaries – totals some $44.6 billion. Inflation, the growth in many existing programs and the increases in public school programs approved last year in response to a Washington Supreme Court order would add another $6.5 million. That’s about $900 million more than the projections for increased tax collections spurred by the strong economy.

On top of those increases, the state also faces an extra $900 million for improved benefit packages negotiated for school employees around Washington and an extra $675 million in raises for state employees, whose unions have negotiated increases of 3 percent for each year.

Inslee wants to spend some $1.1 billion, although not all of it from the general operating budget, to help save the dwindling southern resident orca population which he described as “being pushed to the edge of eternal slumber.”

“Washington state will not allow them to be pushed over the edge,” he said. His plan would include helping restore salmon, which are the orca’s main food source, and a study of the consequences and benefits of breaching federal dams on the lower Snake River.

Inslee’s budget proposal also includes another $600 million for education improvements not covered by the court decision fix, $500 million extra for higher education and $400 million for the first part of his aggressive plans to expand and improve the mental health system.

As he has in past years, Inslee proposes a capital gains tax targeted to upper income residents. The tax of 9 percent would be levied on gains of more than $25,000 for a single person, or $50,000 for a married couple. The Office of Financial Management estimates that 42,000 households, or about 1.5 percent of the population, would pay the tax, which would raise an estimated $975 million over the two-year budget cycle.

Gains from retirement accounts and the sale of homes and farms would be exempt from the proposed tax, but not the sale of a business. Asked why he thought a capital gains tax would succeed this time when it has failed in the past, he replied:

“We recognize there’s a need to pay for the McCleary decision (on school improvements). We’ve eaten the meal, now it’s time to pay the bill.”

Democrats also have larger majorities in both chambers, including some new members who have expressed support for a fairer state tax system.

As it has in the past, a proposed capital gains tax brought cheers from progressive groups who, like Inslee, say Washington’s tax structure that relies heavily on sales and property taxes falls disproportionately on low income residents. It brought criticism from Republicans and conservative groups like the Washington Policy Center, who insist it is an unconstitutional income tax.

“I feel very confident this will pass constitutional muster,” Inslee said. As to criticism that it might slowly be expanded to affect more residents, he said the protection for that would be at the ballot box for legislative elections.

Raising the business and occupation tax on services to 2.5 percent of gross receipts, up from the current 1.5 percent, would raise about $2.5 billion. He also proposed shifting the real estate excise tax from a flat rate to a graduated rate. The tax would drop to less than 1 percent – 0.75 percent – on sales of property under $250,000, stay at the current 1.28 percent for sales between $250,000 and $1 million, and rise to 2 percent for sales above $1 million.

The change would bring in a projected $400 million, which would be placed in the separate transportation budget and used to help comply with a federal court order to replace culverts around Washington that are inhibiting salmon movement.

The governor’s budget proposal is the beginning of the long budget process that will continue through the upcoming 2019 session. House and Senate budget writers usually craft significantly different spending plans, then struggle to work out a compromise that both chambers and the governor can accept.

In past years, negotiations have gone late into June, with budgets signed hours, or in some cases minutes, before the state’s fiscal year ends.