State capital gains tax part of House Democrats' budget plan

OLYMPIA, Wash. (AP) - House Democrats on Friday released a two-year budget plan that proposes a capital gains tax as part of nearly $1.5 billion in new revenue to address a court mandate on education spending, but Senate Republicans quickly countered that new taxes should not be part of the solution.

Under the House plan, the state tax on the sale of stocks, bonds and other assets wouldn't kick in until next year, and would raise $570 million for the last year of the 2015-17 budget. Budget writers say the first $400 million raised would be booked to comply with a state Supreme Court order to increase spending on K-12 education; any additional amount raised beyond that would go to a special account for higher education.

The plan proposes to spend $412 million to reduce class sizes in kindergarten through third grade; $741 million on textbooks and supplies; and $180 million on all-day kindergarten. It also restores cost-of-living raises for teachers that have been suspended by the Legislature for the past several years. House Democrats are also seeking to freeze tuition at the state's universities for two years.

"If the court wants a plan, this is a plan. A funded plan," said Rep. Ross Hunter, a Democrat from Medina who is the main budget writer in the House.

The plan seeks to levy a 5 percent capital gains tax on earnings from the sale of stocks, bonds and other assets above $25,000 for individuals and $50,000 for those who file jointly. The levy would begin in the second year of the biennium, or January 2016. About 31,500 people would be affected by the new tax, lawmakers said. Retirement accounts, most primary residences and most agricultural lands and most timber would be exempt from the tax, as would personal property used in a business.

A slight increase in the state business and occupation tax paid by doctors, lawyers and architects would raise $532 million. The budget plan also doubles the current small service business tax credit, which legislative leaders said would eliminate business and occupation taxes for 15,000 businesses a year. An additional $300 million would come from the repeal of seven tax exemptions, one for oil refineries and other for residents who live in states without a sales tax, like Oregon.

The proposed tax and revenue changes add up to about $1.5 billion and are part of an overall $39 billion operating budget.

Rep. Reuven Carlyle, a Democrat from Seattle who is chairman of the House Finance Committee, said that the state's current tax system is regressive.

"We are looking at those elements of revenue that go to the core of the lack of fairness," Carlyle said. "So it's not about high taxes, or raising taxes, it's about fair taxes."

Not included in the plan was a proposal put forth by Gov. Jay Inslee to increase money to the state's general fund with a cap-and-trade program that would require the state's largest industrial polluters to pay for every ton of carbon they release.

"There is a fierce and strong belief that we have to take meaningful and bold action on climate," Carlyle said, but acknowledged that lawmakers feel they need extra time to understand how to implement such a program.

Senate Republicans have said that that the state has enough for existing services and education through increasing revenues generated by economic growth, and that the focus shouldn't be on higher taxes, but efficient spending.

Republican Sen. Andy Hill, the main budget writer in that chamber, said that creating a new tax to pay for the state's constitutional duty of funding education is not appropriate.

"Quite frankly, I don't know if that's unconstitutional, or just unconscionable," he said.

Hill said that Senate Republicans and House Democrats share the same priorities when it comes investing in education and other areas of the budget, like mental health.

"The difference is that we work really hard to live within our means and we don't use new taxes to pay for what we consider a constitutional duty," he said.

The Senate is expected to release its budget as early as next week. House Democrats and Senate Republicans will each pass their own versions of the budget, but then will work negotiate a final plan before the legislative session ends April 26.