Has the time come for Washington voters to consider new revenue to plug the state’s persistent, ongoing budget gap?
As the Legislature convenes in special session Monday to once again select cuts from a menu of programs — this time to bridge a projected $2 billion deficit by mid-2013 — the R question is on the table.
Gov. Chris Gregoire put it there Monday, when she asked lawmakers to refer a half-cent temporary sales tax increase to voters in a March special election. If voters approve it, the temporary tax would raise $494 million to reverse cuts to K-12 classrooms, prevent another round of tuition increases at state colleges and universities, restore state services for fragile adults, and cancel Department of Corrections cuts that would reduce supervision of ex-offenders and release some prisoners early.
The governor said she could not in good conscience cut further into those programs.
“It’s a new day for me,” she said at Monday’s news conference. “I have seen the ramifications of the cuts. I can’t live with it.”
She noted that the last time the state raised the sales tax was in 1983, under a Republican governor, John Spellman, “in a recession that was not as long and not as deep as the one we are in right now.”
Republican legislative leaders quickly rejected the proposed three-year sales tax hike.
“To talk about raising taxes at a time when people are out of work and can’t afford it suggests an insensitivity to what the
citizens of this state are going through,” said Senate Republican Leader Mike Hewitt, R-Walla Walla.
Even Democratic lawmakers weren’t ready to embrace the governor’s proposal, which she delivered along with a supplemental budget containing another $2 billion in cuts to education, social services and corrections.
All’s on the table
The state’s most powerful business lobby, however, did not dismiss the idea out of hand.
“Today’s announcement seeking a temporary half-cent increase in the state sales tax is not surprising, given the difficult situation we find ourselves in,” said Don Brunell, president of the Association of Washington Business, in a statement. Gregoire has reached out to the association, Brunell said, “and we’ve told her we want to be a part of the solution. That means everything must be on the table — meaning reforms and revenue.”
A balanced approach, with both program cuts and new revenue, is an option that appears to be gaining traction. An October statewide poll of 938 Washington registered voters conducted by the Center for Survey Research at the University of Washington found that 39 percent favored balancing the state budget equally with spending cuts and tax increases, and another 12 percent supported using mostly or only tax increases.
Another 44 percent favored plugging the budget deficit mostly or only with spending cuts.
Rep. Jim Moeller, D-Vancouver, has consistently called for plugging tax loopholes for the wealthy rather than continuing to dismantle K-12 education and the social services safety net.
This month, the nonprofit Economic Opportunity Institute, which says it focuses on “building economic opportunity for the middle class,” released its own slate of $1 billion worth of tax breaks it would like to see eliminated and new taxes it would like to see enacted.
The list includes a repeal of the business and occupation tax deduction that banks enjoy on their profits on home mortgages (worth $120 million); an increase in the manufacturing and wholesaling tax rate paid by oil refineries (worth $250 million); a repeal of the B & O tax exemption for farms with gross incomes above $200,000 (worth $32.7 million), and $249 million in saving from a modernization of the tax code affecting interstate commerce.
In addition, the institute calls for a 10 percent luxury tax on motor vehicles, vessels and aircraft valued at more than $50,000 (worth $70 million); a 50 percent increase in the estate tax (worth $45 million); and a repeal of the sales tax exemption for nonresidents (worth $25 million), a change that Vancouver businesses have consistently opposed.
‘Most regressive’
Marilyn Watkins, the institute’s policy director, said she focused on changes that she thought could win voter support — and be implemented right away.
“We need the money now,” she said. ”We have been cutting back on health programs and home care and services for vulnerable seniors and children. We are putting individuals’ lives at risk and affecting people’s ability to live independently and in basic dignity. It’s really immoral and irresponsible for a country like ours, when we have so many resources available, to make those kinds of choices.”
There’s an economic price to pay as well, she said. “We have seen double-digit increases in tuition every year, at the same time there are fewer slots available for people who need retraining. It really does impact the future of our state and our ability to be competitive in the national economy.”
“In the big picture, we really do need to raise revenue,” Watkins said. “Unfortunately, we here in Washington have a tax structure in which the bulk of public revenues are being paid by middle-income and low-income people. Those with the highest income are asked to pay less. We have the most regressive tax system in the nation.”
Watkins concedes her slate of tax reforms will be a hard sell.
“Every tax break was lobbied for by somebody, and (ending it) will be opposed by some group. It is really going to depend on what legislators hear from their constituents. If they hear that the cuts are going too far, and that they must raise revenues, I think that yes, realistically, a number of these do have a good chance.”
In early November, the liberal-leaning Washington State Budget and Policy Center offered its own revenue-generating proposal : a tax on capital gains — profits from the sale of assets including stocks, bonds and vacation homes. A modest capital gains tax could generate $1 billion a year to fuel job creation and economic prosperity, the center’s directors said, and “would affect only the wealthiest households in the state.”
Those wealthy Washingtonians can afford to pay more, the center said, because while retail sales in the state are growing by just 5 percent a year, capital gains are rising by more than 20 percent annually.
Asked about the idea at her press conference Monday, Gregoire said she looked at it but couldn’t find a way to implement a capital gains tax in a state without an income tax.
She also ruled out a surcharge on the B & O tax, saying it would have a direct impact on small businesses.
Staunch opposition
The elephant in the room when it comes to new revenue of any kind is anti-tax initiative king Tim Eyman. He has effectively tied the Legislature’s hands with the passage of two initiatives that require a two-thirds vote of each legislative chamber, or a direct vote of the people, to enact any new tax. The language of those initiatives, I-960 in 2007 and I-1053 in 2010, also defines the elimination of a tax break as the imposition of a new tax.
Democrats retain narrow leads in both the House and Senate, but have not been able to muster two-thirds votes for new taxes, and their legal challenges to I-960 and I-1053 have failed.
Last week, as Gregoire floated her sales tax increase, Eyman was delivering his own message on taxes.
He noted that in 2010, when lawmakers had a window of opportunity to suspend I-960 and enact new taxes with a simple majority, they did so, passing a $672 million omnibus tax bill. Eyman immediately filed I-1053 to reinstate the two-thirds requirement. Voters passed the new Eyman initiative in November 2010. They also rejected a proposed income tax and, in Initiative 1107, bankrolled by the beverage industry, they said no to taxes on soda, candy and bottled water already enacted by the Legislature, leaving the state with a projected $4.5 billion budget shortfall.
But, Eyman said, most of the taxes the 2010 Legislature passed remain in place.
“(Initiative) 1107 only repealed a small percentage of the taxes passed by the Legislature, about 7 percent,” he said. Thanks to the suspension of the two-thirds rule, he said, taxpayers will pay an additional $7.1 billion over the next 10 years — taxes on the service industry, hospital assessment fees and other fees.
He questions why lawmakers didn’t do more to plug tax loopholes in 2010, or in the years between 2003 and 2007, when there was no two-thirds requirement in place.
“If there was ever a perfect storm of Democratic majorities in the House and Senate,” it was in 2010, he said. “They could have gotten rid of any one of them, and who did they raise taxes on? Joe Sixpack. They were in a strong position. But even they know there isn’t this pot of money at the end of the rainbow.”
So can Eyman conceive of any state budget dire enough that he could support new taxes?
“If government is having it tough, taxpayers are having it even tougher,” he said. “Our role is to remind (legislators) that as you think about raising taxes, regular taxpayers are struggling too. The only time government is able to have decent growth in revenue is when there’s growth in the economy.”
Kathie Durbin: 360-735-4523 or kathie.durbin@columbian.com.
