Washington Gov. Inslee rolls out $57.6 billion budget plan that includes capital gains tax
Washington Gov. Jay Inslee on Thursday unveiled a 2021-23 operating budget proposal that includes $57.6 billion in spending for state operations such as schools, prisons, and social services. It would be funded in part by dipping into the state’s reserves and introducing a tax on capital gains.
The proposal represents a roughly 10.5 percent increase in spending over the current biennium and includes $1.7 billion in spending for new policies.
A funding increase is warranted, the proposal argues, to continue responding to COVID-19, rebuild the economy, and address societal inequities while avoiding cuts to existing services and keeping the budget balanced. In statements released Thursday, Republican budget writers disagreed.
Under the plan, the state would clear out the $1.6 billion in its “Rainy Day Fund” in 2021, then start replenishing it the next year when the capital gains tax would kick in.
The state’s currently projected to have about $2.5 billion in total reserves when the current biennium ends in mid-2021. The new proposal would end the 2021-23 biennium with just under $1 billion in total reserves.
The budget also includes a new tax on health insurers to fund “foundational public health services.” The so-called “covered lives” tax would charge health insurers a monthly fee per member they cover.
Revenue from that tax isn’t included in the general fund budget, because it would be directed to a different account.
Both the capital gains tax and the tax on insurers would go into effect in 2022. The tax on health insurers would start March 1, 2022, and is expected to bring in $205 million in 2023, then roughly $343 million the following biennium.
The capital gains tax would go into effect Jan. 1, 2022, with the first tax payments due April 15, 2023. It’s could bring in $1.1 billion in new revenue in the next biennium, and a total of more than $3.5 billion over the next four years.
What Inslee’s proposing is a 9 percent tax on capital gains earnings above $25,000 for individuals, or $50,000 for joint filers, that would apply to sales of stocks, bonds, and other assets. It would not apply to sole proprietor businesses, retirement accounts, homes, farms, or forestry, according to budget highlights. Nor does it apply to earned income.
The tax would affect about 1.9 percent of households in the first year, according to the budget highlights document.
A similar tax has been proposed by Democrats in previous years, pitched as a way to put more of the state’s tax burden on wealthy residents and start to address a regressive tax system. Republicans have objected to the idea, in part saying it’s a tax on income and in violation of the state Constitution.
Inslee said he believes it’ll pass the Legislature this year, and that he’s open to other options.
“If not now when?” Inslee said. “When will we ever improve the fairness of our tax system if not this year, when the pandemic has exposed massive economic ... inequality, a desperate need for funds for our children and our own health.”
David Schumacher, director of the state’s Office of Financial Management, said Thursday that the legal analyses he’s seen assume the tax is legal and that the state can count on it.
The governor is also proposing “an extra-large capital budget” for the next biennium, tapping future bond capacity now with the goal to kick-start economic growth while addressing infrastructure needs. That proposal includes $400 million to build affordable housing and preserve existing housing, $800 million for 80 school projects, and other investments.
His proposed transportation budget includes $724 million to work toward meeting a court injunction that the state must remove culverts that block salmon and steelhead, $400 million for infrastructure preservation, and funding for clean transportation as part of the governor’s climate policy package.
How money is spent
The governor’s two-year plan includes spending to continue to respond to the pandemic, including $397 million for resources such as personal protective equipment, testing supplies, contact-tracing staff, and vaccine distribution needs.
It also includes efforts to lower unemployment insurance rate increases for businesses and increase weekly benefits for unemployed workers. There’s funding for child care providers, such as $2.2 million for personal protective equipment, $29 million to ease health care insurance premium costs for child care employees, and $9 million to expand broadband access for child care businesses.
Earlier in the week, the governor highlighted some of his other proposed policies, including $65 million in equity-focused proposals and about $450 million in climate legislation across the operating, capital, and transportation budgets.
The equity package he pitched includes $26 million to create an office to investigate and prosecute police use of excessive force and $10 million to add to the state’s COVID-19 Immigrant Relief Fund.
The wide-ranging climate package includes a $12.6 million effort that would put a cap on greenhouse cap emissions for some industries and use proceeds from selling greenhouse gas credits into an account for green investments. There’s also funding to implement a low-carbon fuel standard, a push that hasn’t been successful in recent years.
Of that climate package, $221 million is in his proposed capital budget, $210 million is in the proposed transportation budget, and $21 million is in his operating budget proposal, breakdowns show.
In the short term, the governor plans to urge the Legislature in January to provide an additional $100 million in business grants and $100 million in rental assistance.
Sen. Christine Rolfes, D-Bainbridge Island, and Rep. Timm Ormsby, D-Spokane, the top budget writers in the state legislature, released statements supportive of the proposal Thursday. Ormsby called the plan a “good starting point,” and both supported the governor’s priorities.
“I appreciate the work the governor has done to craft a budget proposal that makes critical investments in public health to reinforce our state’s pandemic response,” Rolfes’ statement reads. “I also appreciate his proposals to strengthen our unemployment system and help workers and households struggling through no fault of their own.
“We face historic challenges this session and this proposal offers a strong starting point that will help guide the Legislature as we work to deliver a balanced budget that will improve lives across our state while incorporating an equity lens to ensure a fair distribution of state resources.”
Top Republicans on the House and Senate budget committees, in contrast, pushed back on the idea that new taxes should be introduced during a pandemic.
Sen. Lynda Wilson, R-Vancouver, said that despite economic setbacks, “there is no budget crisis” and that beyond making new investments to help people who’ve suffered during the pandemic, the state should “hold the line on spending.” Rep. Drew Stokesbary, R-Auburn, was also critical.
“Now, more than ever, hard-working families need relief — not higher costs that will further strain their own budgets,” his statement reads.
“Unfortunately for Washington taxpayers, there are virtually no cost-saving measures in the governor’s proposal. Despite constantly increasing tax collections, and even accounting for the current economic slowdown, the governor is still proposing to impose new taxes and drain the state’s ‘rainy day fund,’ all to fuel yet another $4 billion in new spending. Those who hoped for a fiscally-responsible budget will be sorely disappointed.”
Fluctuating state revenue, continuing uncertainty
The proposal comes in a tumultuous year, during which the state’s revenue forecasts have been subject to the forces of a global pandemic. And, while the state received an influx of federal assistance this year, the extent of any federal relief remains uncertain.
In April, Inslee vetoed about $445 million in spending in the state’s budget in anticipation of a steep revenue decline related to COVID-19 — some of what was vetoed, such as funding for guidance counselors and paraeducator training in K-12 schools, would be restored in the proposal.
Actions such as a hiring freeze, furloughs, and canceling a planned wage increase resulted in more savings in the current budget. State employees’ collective bargaining agreements for the 2021-23 budget don’t include general wage increases and call for monthly one-day furloughs for most employees, according to the budget highlights.
The proposed budget also relies on savings, such as those seen in public education, according to the budget highlights document. Funding for the K-12 system is largely driven by enrollment, which has dropped for most schools. The governor’s suggesting the state reinvest some of those savings to address lost learning hours and use the rest to balance the budget.
The president of Washington Education Association, the state’s largest teachers union, said the governor’s proposal “falls short of the already inadequate status quo by not adjusting the funding formulae for enrollment and transportation.”
“It falls short of the status quo and continues to hurt the students who need the most help,” president Larry Delaney’s statement reads. “Even in the new school year, districts will need additional resources to provide safe learning environments, with more custodial staff, ongoing needs for PPE, social distancing, cleaning and sanitizing practices along with mental health supports.”
Revenue projections saw a massive drop at the start of the pandemic and have improved continually since — though officials continue to warn of significant economic uncertainty.
In June, revenues through mid-2023 were projected to be almost $9 billion lower than previous predictions, and the outlook improved by $4.6 billion in September. The most recent numbers show revenues are projected to be $3.3 billion short of what was expected pre-pandemic.
The governor’s proposal comes against a backdrop of unknowns around what resources might be offered in a federal relief effort.
Details that started to emerge Wednesday about a possible deal, CNN reports, included small business loans, stimulus checks, jobless benefits, money for vaccination distribution and schools, and money for the Federal Emergency Management Agency to dole out to states and cities. But, it didn’t include any direct funding for state and local governments.
What happens now
The governor’s suggestions aren’t mandates.
He’s required by law to recommend a budget in December. The 49-member state Senate and 98-member House of Representatives, both of which are controlled by Democrat majorities, will develop their own proposals and ultimately deliver a budget to the governor’s desk.
The Legislature can revise the two-year plan in the future via supplemental budgets. In March, for instance, the Legislature revised the current operating budget to provide about $170 million more in funding to address homelessness and tapped the Rainy Day Fund for pandemic response funds.
Lawmakers are required to enact a budget with a positive ending fund balance in the state’s General Fund and related funds over four years. The General Fund is the state’s biggest account. It’s fed by revenue from state taxes such as retail sales, business, and property taxes.
Getting money out of the state’s Rainy Day Fund usually takes a three-fifths vote of the Legislature. But, it takes a simple majority in each chamber when forecasted state employment growth for a fiscal year is under 1 percent or when the governor declares an emergency that requires government action to protect life or public safety, according to state budget documents.
The 2021 legislative session is scheduled to kick off Jan. 11, and the state’s two-year budget will go into effect July 1, 2021.
This story was originally published December 17, 2020 at 2:36 PM with the headline "Washington Gov. Inslee rolls out $57.6 billion budget plan that includes capital gains tax."
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