Expanded programs, new taxes in House Democrats’ budget proposal

OLYMPIA – State government should spend more on schools, mental health care, college scholarships, early childhood education and salaries in the next two years, House Democrats said Monday as they released their 2019-21 operating budget.

To pay for all those things, it should enact a capital gains tax, rearrange the real estate excise tax and raise the business and occupation tax for large tech companies and businesses that rely heavily on college graduates.

House Democrats, who hold a comfortable majority in the chamber, unveiled a general operating budget that would spend $52.6 billion over the next two years. That would be a record for a state operating budget – which for the current budget cycle is about $44.7 billion – but is less than the $54.4 billion budget Gov. Jay Inslee proposed in December.

Senate Democrats are expected to release their budget proposal late this week.

The programs to be added are “kitchen-table type issues” that affect families around the state, House Appropriations Committee Chairman Timm Ormsby, D-Spokane, said. It adds more than $200 million for improvements in the state’s system of mental health treatment, from new community facilities to the first payments for a new psychiatric teaching hospital at the University of Washington. It also would add money for early childhood education and child care services, a rate increase for hard-to-place foster children and an expanded college scholarship program.

House Republicans were quick to criticize the call for new taxes, noting the state has a surplus.

“We can easily write a budget that funds all of our state priorities without raising any new taxes,” said Rep. Drew Stokesbary, of Auburn, the ranking Republican on the Appropriations Committee.

But Majority Leader Pat Sullivan, D-Covington, said the extra revenue the state will collect is already spoken for, by the improvements to public schools to satisfy a Supreme Court ruling, which passed in 2017 with bipartisan support. The costs of the so-called McCleary fix obligate the state to increased education spending in the coming years, he said.

“Republicans as well as Democrats made that commitment,” Sullivan said.

The total package for the House operating budget proposal is about $2 billion more than the projected tax revenue legislators were told to expect last week by the state economic council. To cover that difference, they are proposing a 9.9 percent tax on capital gains above $100,000 per year for an individual, or $200,000 a year for a couple. House Finance Committee Chairwoman Gael Tarleton said that would affect an estimated 13,401 people, or four-tenths of 1 percent of state residents.

The capital gains tax has a different structure than one proposed by Inslee, but House Democrats use the same argument, that the state’s current tax system is regressive because it relies too heavily on sales and property taxes, which take a larger percentage of earnings from lower- and middle-income residents than the wealthy.

But it’s controversial, with critics saying a capital gains tax is really just an income tax, which voters have rejected and the Supreme Court has limited without voter approval. Because of expected legal challenges, Tarleton said the budget doesn’t include money from the capital gains tax until July 1, 2020, the start of the second year of the biennial budget cycle.

House Democrats are also proposing a change to the real estate excise tax, which is currently a flat rate of 1.28 percent on a home sale. They would drop the rate to nine-tenths of 1 percent for home sales below $500,000 and keep it the same for sales up to $1.5 million. It would increase to 2 percent for home sales between $1.5 million and $7 million, and climb to 3 percent above $7 million.

A third tax change is what House Democrats call a Workforce Education Investment and would help expand the State Need Grant, which they would rename the Washington College Grant. It would provide scholarships for families within 70 percent of the state median income and provide more student slots in high demand programs such as nursing, computer science and engineering. Service businesses that rely heavily on workers with post-secondary educations – such as software engineers, accountants and doctors – would see the B&O rate on their gross receipts go from 1.5 percent to 1.8 percent, and certain large global tech companies, including Microsoft and Amazon, could see their rate go as high as 2.5 percent.

Along with the $52.6 million operating budget, House Democrats separately released a $9.9 billion transportation budget, which does not have a carbon fee or some other vehicle taxes proposed in the Senate. It does, however, call for higher fares and vehicle charges for the state ferry system and an increase in vehicle license fees.

They also released a $4.6 billion capital construction budget, calling for improvements to Eastern and Western State hospitals and more spending on community mental health facilities. It would also spend $1.1 billion on public school construction, $927 million for facilities on college campuses and increase money for affordable housing and clean water projects.

As part of the state’s push to improve mental health and health care, House Democrats are proposing to spend $33.8 million in construction money and $10 million in operating funds over the next two years for the proposed University of Washington psychiatric teaching hospital in Seattle.

The operating budget also calls for $11 million over the next four years to cover the costs of students going into their third and fourth years at the WSU Spokane Elson S. Floyd College of Medicine, but not the $2 million the college would need to cover the planned expansion from 60 to 80 students in the incoming classes later this year and in 2020.

Sullivan said the expanded classes for the new medical school were left out of the budget proposal as House Democrats tried to separate “wants and needs.” Money for the third and fourth years of students already in the program was a need, but adding more students to the program was a want, he said.

The operating budget proposal could come up for a vote as early as Friday, although the separate tax proposals are likely to wait until the House and Senate come to a compromise over spending.