Friday Roundup: Tech and NY real estate, public records in Olympia, tolling for infrastructure and congestion relief

There are always a few items we’ve read during the week that deserve more attention but don’t make it into our regular posts. So we bundle them for the Friday roundup.

Here’s this week’s bundle:

New Geography: New York’s Tech Sector Gobbling Up Real Estate 

Google, which already owns a gigantic building in Manhattan, is buying Chelsea Market for $2.4 billion

But it is only the latest example of an internet behemoth, and even smaller tech companies, expanding rapidly in New York City.

Amazon, Facebook, Salesforce, a cloud computing company, and Spotify, a music streaming service, are all enlarging their footprints here by hundreds of thousands of square feet. Employment at technology firms has grown three times faster in New York City than in the rest of the private sector, adding more than 50,000 jobs since the end of the recession in 2010, according to a report by the state comptroller.

Seattle Times: Insistence on public-records secrecy for lawmakers is slap in the face to the public they serve

A judge told state legislators a month ago that they were breaking the law by refusing to release their emails, calendars and other working documents to the public.

Now, rather than comply with the court’s order and disclose the information they illegally withheld, your elected lawmakers are trying to cram through a bill to remove themselves from the state’s Public Records Act — a blatant attempt to circumvent the court ruling and keep their past communications and other records private.

E21: Tolls Can Fund Infrastructure and Reduce Congestion

A major objective of tolls is to let paying drivers travel more quickly. If some vehicles, say, high-occupancy vehicles (HOVs), are to be exempt from payment, tolls would have to be higher than otherwise for nonexempt vehicles to achieve the speed objective. But since HOVs impose the same costs as single-occupancy vehicles, exempting HOVs makes little economic sense. (Hotels do not offer free rooms to people willing to share them.) Tolls themselves already encourage car sharing, and counting the people in vehicles has always been difficult. The claim that the HOV exemption significantly increases car sharing is not borne out by evidence. Many HOVs carry family members who would travel together even without a toll exemption.

The Lens: Is your county “rural” enough?

State lawmakers behind a bipartisan proposal to reduce the business and occupation (B&O) tax rate for manufacturers say they want to help rural Washington catch up with the rest of the state and boost the state’s struggling manufacturing sector. But some legislators say the legislation’s definition doesn’t match what one would normally consider “rural.”

The dispute led several Republicans on the House Finance Committee to vote against HB 2992Feb. 19, just days after its introduction.

“Being on one side or the other of the White River, or the crest of the Cascades does not define rural,” Rep. Drew Stokesbary (R-31) remarked. “I would challenge any of you to come back to my district and tell me that I do not represent rural areas.”

Seattle Times: Seattle plan for free transit for students among most generous in nation, mayor says

Mayor Jenny Durkan’s proposal to make buses and light rail free for public high-school students would make Seattle the largest city in the country to offer free transit service to students, the mayor’s office said.

Fewer than half of bus agencies across the country even offer a discounted (half price or better) fare for high-school students, according to the American Public Transportation Association.

House budget relies on new capital gains tax, reduces property taxes and does not accelerate teacher salary funding

The House budget released yesterday (more links) differs in two key respects from the Senate proposal: It relies on a new (and likely illegal) capital gains tax and does not attempt to satisfy the state Supreme Court’s demand that lawmakers accelerate full funding of teacher salaries. 

The Seattle Times reports,

Washington House Democrats want to take a big bite out of the new state property-tax increases — and they want a capital-gains tax to help fund it.

…But in their budget plan released Tuesday, House Democrats decided to skip the $1 billion suggested by the court to fully bring the state into compliance on K-12 funding.

Democrats in the state House released a 2018 supplemental budget proposal Tuesday that would ignore a court order to speed up reform of how K-12 teachers are paid and would cut property taxes in 2019 and 2020 using a surge of unexpected cash reserves.

The budget plan would reduce property taxes even further starting in 2021 but would replace the lost revenue with a tax on capital gains — money made on the sale of stocks, bonds and other financial assets.

The proposal reveals big differences between how House and Senate leaders hope to tweak the two-year budget approved in 2017 before the 60-day session ends on March 8.

Reconciling the two approaches will be the focus of the final weeks of the session. There are clear challenges.
 

“We feel confident we have the votes out of our chamber,” [House Finance chair Kristine] Lytton said. “So we plan on passing it out of the House.”

Previously, Senate Majority Leader Sharon Nelson has said she didn’t have the votes in her caucus to pass a capital gains tax. Senate Democrats did not include the tax in their budget proposal that was released on Monday. However, that budget did include a more modest one-time property tax cut of approximately $400 million.

The Seattle Times story suggests the governor, who still wants a carbon tax, does not appear to be banking the capital gains tax revenues yet.

Gov. Jay Inslee appreciates the House capital-gains proposal, an approach the governor has previously proposed, said Inslee spokeswoman Tara Lee.

But, “I think he recognizes that politically it may be a tough sell,” Lee said.

The tax will get an early test, reports the Spokesman-Review.

House Democrats have proposed a capital gains tax in the past, but have not passed it out of the chamber. House Majority Leader Pat Sullivan, D-Covington, said it would be brought to the floor Friday along with the budget.

Lytton said the new tax would be “revenue neutral”, meaning the total property taxes collected in the state would be reduced by the amount of money the capital gains tax raised.

But Republicans are opposed to the tax, calling it a capital gains income tax that would lead to an overall income tax eventually.

And on the spending side, from The News Tribune story it appears the divide is wide as well,

House Majority Leader Pat Sullivan, D-Covington, told reporters Tuesday that speeding up the salary overhaul could strain school districts already implementing large changes. Sullivan said the phase-in was set up to prepare schools for complex reform…

Justices have also threatened further sanctions for not complying with deadlines.

But Sullivan — and many in the GOP — have said keeping the existing salary phase-in is worth the risk.

Sen. John Braun, R-Centralia, echoed Sullivan on Tuesday, telling reporters that state money can be spent in more effective ways than speeding up an overhaul of teacher salaries.

There are always a number of issues that have to be resolved to reach budget agreement. As more analysis comes available, we share it. But the keys right now appear to be the timing and amount of property tax relief, teacher compensation as directed by the court, and the capital gains tax. We still anticipate an on-time adjournment.

Senate proposes supplemental budget without new taxes; funds teacher salaries, uses reserves to cut property taxes.

The Senate Ways and Means Committee has released the chair’s proposed supplemental budget (links). From the highlights:

The Senate Chair’s proposed budget includes the following policy related spending changes:

  • $1.2 billion in net increased policy adds including fully funding the K-12 salary increases as required by the State Supreme Court November order and funding the McCleary court penalties (other major increases include $160 million is in Mental Health and Developmental Disabilities/Long Term Care);

  • $403 million from the Budget Stabilization Account for a $0.31 state property tax reduction in calendar year 2019; and

  • $22 million from the Budget Stabilization Account for fire related costs.
    The projected ending fund balance at the end of 2017-19 is $922 million and $2.4 billion in total reserves.

The proposal satisfies the four-year balanced budget requirement, according to the chair.

The Chair’s budget proposal, under the provisions of the four-year budget outlook (Chapter 8, Laws of 2012), is projected to end the 2019-21 biennium with $82 million in NGF-P ending fund balance and $1.9 billion in total reserves.

The proposal does not rely on new taxes. From the web page of the Senate Democrats:

“This budget represents a responsible and thoughtful approach in spending our state’s resources,” said Christine Rolfes, D-Bainbridge Island, chair of the Senate Ways & Means Committee and chief budget writer. “We have seen substantial gains in our economy, but we also recognize the growing needs of Washington’s 7.5 million residents. I’m proud this budget makes targeted investments without any new taxes. It’s a document based on a vision of healthy families, safer communities and an economy that works for everyone across the state.”

The Seattle Times reports,

Washington Senate Democrats want to use soaring tax revenues to address both the state Supreme Court’s K-12 school-funding order and the added burden on homeowners facing higher property-tax bills to fund schools.

Senate Democrats on Monday released a supplemental operating budget proposal that adds approximately $970 million for school-worker salaries and is intended to satisfy the court’s McCleary decision.

Timing makes property tax reductions difficult, so the tax relief comes next year.

Rolfes said it’s difficult to lower taxes this year, since bills are already calculated and being mailed out.

The new Democratic budget proposal would spend $403 million in budget reserves to make a one-time, 31-cent cut to the state property tax rate for the 2019 calendar year.

 The House is expected to release its budget next week.

Washington Research Council releases analysis of proposed state capital gains tax

The Washington Research Council has analyzed the capital gains tax proposal heard last Friday in the House Finance Committee. In brief,

The questionable constitutionality of the tax makes it a risky source of revenue, whether for the schools as previously proposed or property tax relief now. Moreover, should the legislation somehow clear the high constitutional bar, the volatility of the tax would add a substantial degree of instability to property tax bills. It’s unlikely any property owner would welcome an unpredictable tax bill. Finally, the legislation is unlikely to make any substantial impact on the alleged and misdiagnosed regressivity of the state tax structure.

The brief takes a close look at errors in an often-cited analysis of the state’s tax structure.

The bill’s introduction describes the Washington’s tax system “as the most upside down and regressive in the nation.” This characterization is based on a flawed study by the Institute on Taxation and Economic Policy (ITEP). We have critiqued this study in previous reports (WRC 2010). The study has a number of serious problems: It’s a point-in-time measure relying on flawed data; it over- states the significance of state taxes by failing to recognize the progressivity of the federal income tax; and, its allocation of the tax burden across income groups overstates the degree to which sales taxes and business taxes are paid by low income households. Together, these errors substantially overstate the regressivity of the Washington tax structure.

We recommend you read the brief in its entirety. Here’s the WRC’s extended example of how the ITEP analysis leads to the false characterization of the tax burden.

We will highlight one problem here: The estimation of sales taxes paid by house- holds at the bottom of the income distri- bution.

ITEP uses the U.S. Bureau of Labor Statis- tics’ quarterly Consumer Expenditure Survey (CES) to determine how family expenditures vary with income. This sur- vey finds that on average low-income households spend much more than they take in income. For 1992 (the data vintage ITEP uses) the lowest 20 percent of households reported average expendi- tures equal to 216 percent of average after-tax income; the second quintile of households reported average annual expenditures equal to 136 percent of aver- age income; and the third quintile of households reported average expenditures equal to 114 percent of average after-tax incomes. Economists call spend- ing in excess of earnings “dissaving.”

Researchers at the Urban-Brookings Tax Policy Center have critiqued the CES methodology and find a reason for the apparent substantial discrepancy. They conclude

The most credible explanation for the high level of dissaving in the lowest and second-lowest income quintiles . . . is that the income reported in the [consumer expenditure survey] is substantially understated. (Toder, Nunns and Rosenberg 2011)

..Because income is understated in the CES for lower income households, ITEP over- estimates the purchases of these house-holds, and this leads ITEP to overestimate the amount of sales tax paid by these households.

Additionally, ITEP assumes that much of the taxes paid by businesses is pushed forward onto customers and distributes these taxes across households in proportion to consumption expenditures. The overestimation of consumption expenditures of low income households leads to an overestimation of the amount of business taxes they bear. The effect of this overestimate is not uniform across states. Because Washington state’s sales tax rate is higher than that of most other states and because Washington places a higher tax burden on businesses than do most other states, ITEP overestimates the tax burden of lower income households to a greater degree for Washington than for most other states. Consequently, ITEP’s state tax burden rankings are unreliable.

The intent section of the bill, of course, is simply a signal of the proponents’ intent. In this case, the intent is based on a misguided analysis. There are other good reasons, fully explored in the WRC brief, for rejecting the capital gains tax. This is compelling:

HB 2967 characterizes the capital gains tax as an excise tax. For all intents and purposes, though, it is an income tax, imposed on a narrow subset of income. In January, we analyzed Superior Court Judge John Ruhl’s decision rejecting the City of Seattle’s income tax (WRC 2018). Although the ruling did not hinge on his rejection of the city’s claim that its in- come tax is really an excise tax, Ruhl specifically struck down both arguments ad-vanced by the city in support of its unusual definition. As the Tax Foundation writes,

Courts frown on such semantic games and prioritize substance over form—and especially over nomenclature. Just last year, when Seattle tried to impose a high earners income tax by calling it an excise tax, a court dis- pensed with the idea in short order. A tax that falls on income is an income tax, whatever the name. (Walczak 2018)

If, then, the capital gains tax is an income tax, the 7 percent rate would conflict with the state constitution, which sets a 1 percent cap on the tax rate that can be applied to income.

Even in the unlikely event a court should hold that this capital gains tax is, in fact, an excise tax, HB 2967 might be challenged as violating Article 1, Section 12 of the state constitution, which states: “No law shall be passed granting to any citizen, class of citizens, or corporation other than municipal, privileges or immunities which upon the same terms shall not equally belong to all citizens, or corporations.” It seems problematic that the capital gains of S corporations would be subject to tax, while the capital gains of C corporations would be untaxed.

Every state that currently taxes capital gains does so through its state income tax rather than through a standalone excise tax.

 With $1.3 billion added to the revenue forecast last week, the pursuit of an unconstitutional capital gains tax seems particularly quixotic.

Friday Roundup: Online political ads, hope for humanities grads, inclusionary zoning, and a possible Seattle “head tax”

There are always a few items we’ve read during the week that deserve more attention but don’t make it into our regular posts. So we bundle them for the Friday roundup.

Here’s this week’s bundle:

Governing Magazine: Facebook’s brewing legal battle with cities and states

In early December last year, a reporter for The Stranger walked into the Seattle offices of Facebook, printouts of the city code in hand, to ask for detailed information about online ad purchases for the city’s 2017 elections.

Two months later, the city is on the brink of fining Facebook for failing to turn over the requested information. It’s the first attempt by any state or locality to enforce its political advertising disclosure laws on a social media company. Facebook is facing a $5,000 penalty per ad.

According to experts in campaign finance and advertising disclosure, this is likely just the beginning of states and cities’ attempts to crack down on the secrecy surrounding political ads on the internet.

Seattle Times: Report busts myth of unemployable humanities grads

The American Academy of Arts & Sciences wants you to know that studying the humanities is not a career-killing dead end. In “The State of the Humanities 2018,” released last week, the national academy makes the case that humanities majors are doing just fine when it comes to pay, job satisfaction and career advancement.

And the report comes on the heels of a new Microsoft e-book on artificial intelligence, which discusses an important role that the social sciences and humanities will have in the development and management of artificial intelligence.

These are jobs that often require a trade certificate or a two-year degree.

The News Tribune: Half of Pierce County workers could be replaced by robots, analysis shows

Roughly half of workers in Pierce County have jobs a University of Oxford study rated as having a high probability of becoming automated in the future, including positions in retail, food prep, truck driving, and the labor industry…

Many of these workers may be unable to relocate or retrain for a new, higher-qualifying job should their current position become obsolete, according to Jacob Vigdor, a professor with the Evans School of Public Policy and Governance at the University of Washington.

Seattle Times: Seattle panel closing in on plan to fund homeless aid with a business “head tax”

A Seattle task force will start wrapping up its work Thursday, setting the stage for the City Council to pass a new tax on high-grossing businesses like Amazon….

The Seattle Metropolitan Chamber of Commerce, which represents 2,200 companies, including heavy hitters like Amazon, declined an invitation because its members saw no point in serving on a panel wedded to an idea they oppose, said Markham McIntyre, chief of staff.

Though the council resolution that created the task force leaves room for the panel to explore other “progressive” revenue tools, it says the recommendations should include an evaluation of a head tax capable of raising $25 million to $75 million a year.

New Geography: Inclusionary zoning flops in Portland

As the price of housing continues to rise in many cities, one popular progressive policy idea to address it is inclusionary zoning. Inclusionary zoning requires that a certain percentage of units in a building be priced at below market, targeted at people who earn some fraction of the area median income. Often this set aside is required in exchange for density bonuses or other things the developer might want.

Portland passed one of these, and according to a report in the Portland Mercury, construction fell off a cliff…

Stateline: Trump’s historic Medicaid shift goes beyond work requirements

The administration signaled late last year that it welcomes state-based ideas to retool Medicaid and “help individuals live up to their highest potential.” At least 10 states have requested waivers that would allow them to impose work requirements and other obligations.

For example: They would require more recipients to contribute small monthly premiums. They would insist on monthly paperwork. They would impose lifetime limits on coverage. And they would kick recipients off Medicaid for a period of time — 30 days, or perhaps six months — for failing to follow the rules.

Combating congestion: Seattle bucks national transit downturn; more thoughts on telework and road use fees

That Seattle is an outlier – local officials might prefer trendsetter – is an understatement. We’ve been critical of some pathbreaking policies ($15 minimum wage, income tax, soda taxes, and so on). But to give credit where it’s due, Seattle comes in for some national recognition for being one of only two large cities to see an increase in transit use. 

Randal O’Toole writes in New Geography,

The results show that 2017 [transit] ridership was lower than in 2016 in all but two of the fifty largest urban areas: Phoenix and Seattle.

It may be that Seattle stands alone.

Phoenix’s positive numbers may be deceptive as 2016 was a considerable drop from numbers posted in 2012 through 2014. As a result, while 2017 ridership was a 3.5 percent increase from 2016, it was still 4.7 percent less than 2013. Ridership will have to grow for a couple of more years before it reaches 2013 levels.

We’ll leave aside for now the usual arguments about costs and benefits, or the downsides of demand management strategies to reduce personal vehicle use. Transit remains a necessary element of a regional solution to urban congestion. Something’s working.

The Seattle Times has more on transit use in the city.

As public transit stagnates in most U.S. cities, central Seattle continued its rapid growth by adding roughly 10,000 morning transit commuters last year, new local data show.

The proportion of commuters who arrive in the morning by train, bus, streetcar or walking onto ferries has reached 48.4 percent, or by 126,808 people. Daily ridership exceeds 250,000 when midday, swing shift and afternoon commutes are added.

The 2017 data are the first to fully account for new light-rail stations that opened during 2016 at the University of Washington, Capitol Hill and Angle Lake in SeaTac. Those stops doubled overall train ridership, while bus use stayed the same or grew.

Figures were released Wednesday by the Seattle Department of Transportation (SDOT) and Commute Seattle.

The other big change is bus frequency, funded mainly by a $60 car-tab fee and 0.1 percent sales-tax Seattle voters approved in 2014. Those taxes now supply roughly one-third of all runs for three RapidRide lines and frequent route 40 in Ballard-Fremont, said Andrew Glass Hastings, SDOT transit and mobility director.

Of course, avoiding the commute altogether is a welcome alternative, as the Seattle Times reports in another story.

For the last five years, King County Metro has run what it calls WorkSmart, a free consulting service to help businesses set up telecommuting programs for their employees.

“Even though we’re primarily a transit agency, telework is just another way we can support people in getting the work that they need to get done,” said Sunny Knott, Metro’s program manager for WorkSmart. “It supports our interest in mitigating congestion and encouraging people to get to work in ways other than driving alone.”

There is room for improvement. Telecommuting accounted for just over 3 percent of morning commutes to downtown Seattle in 2016, according to a survey of businessesfrom nonprofit Commute Seattle. Nearly 10 times as many people drove to work alone.

There are plenty of reasons to believe the numbers of telecommuters will grow.

But as Seattle increasingly becomes a technology hub, with jobs that are less site-specific, telework provides benefits to businesses, workers and the city at large.

…Now, as downtown Seattle prepares to enter its so-called “period of maximum constraint,” with construction projects from modest to mega about to bring traffic to a near standstill, telecommuting is gaining traction among policymakers as a way to help keep commerce — if not necessarily traffic — moving.

For those stuck in traffic, road improvements are also critical. We’ve written about how state governments, including Washington state, are exploring alternative ways to fund transportation infrastructure, including a road usage fee. MyNorthwest.com has more on this and lessons from California.

Wow! Revenue forecast up $1.3 billion through 2019-21 biennium.

Quarterly revenue forecasts from the Economic and Revenue Forecast Council (ERFC) in recent years have been a series of incremental good news as Washington’s economy enjoys robust growth. Today’s report is less incremental than it is monumental. For the balance of this biennium and the next, the forecast adds $1.3 billion.

 The General Fund-State revenue forecast for the 2017-19 biennium has increased by $647 million, and revenue for the 2019-21 biennium has increased by $671 million. 

Forecasted revenue for the 2017-19 biennium is now $44.213 billion, 15.4% more than that of the 2015-17 biennium. Forecasted GF-S revenue for the 2019-21 biennium is now $48.253 billion, 9.1% higher than expected 2017-19 biennial revenue. 

In our newsletter Monday we wrote,

We expect the new forecast to show a large increase in anticipated revenues. That could dampen the somewhat surprising legislative discussions of new taxes (capital gains, carbon, soda and more) in this short, supplemental budget year with no revenue shortfall.
By “large increase” we were looking at something north of $600 million for the two biennia, not $600 million in each of the two. The ERFC cites a strong housing market, improved export activity, and increased personal income as a result of the federal tax reduction. 
 
Good news all around.

Business and labor leaders express support for expanded data center tax incentives in Wenatchee World commentary

Last week we took note of a state Commerce Department report on Washington’s lagging competitiveness for data centers. Today, we want to cite a Wenatchee World op-ed (behind a pay wall) by Matthew Hepner, executive director of the Certified Electrical Workers of Washington, and Robin Toth, vice president of Greater Spokane Incorporated. They identify the economic importance of data centers to our state, writing,

Legislation proposed in Olympia will extend Washington’s existing data center investment incentives statewide. Expansion will make Washington’s metro areas more attractive for data center location, but everyone, regardless of where you live, should support passage.

Data centers touch virtually every aspect of our lives, including education, healthcare, financial services, e-commerce, manufacturing, communications, and entertainment. They are the foundation of the digital economy, increasing productivity and enabling business and personal transactions. With increasing reliance on cloud computing, artificial intelligence and Internet of Things, their importance continues to grow.

Currently, as the Commerce Department study found, 

Washington is almost the only state that limits its sales and use tax exemptions to specific rural counties. The data center market has changed dramatically since the state of Washington formulated its thinking. The projects are larger, the stakes are bigger, and there are three times as many states competing for these deals…

Urban Washington counties that do not have access to sales and use tax exemptions for data centers will continue to be at a competitive disadvantage to other urban data center markets, such as Portland that either do not have sales tax or that offer tax incentives that abate the sales tax.

Hepner and Toth write,

Construction of data centers in rural communities has ebbed and flowed in direct relation to the state incentives provided. With incentives in place, rural Washington locations have been competitive. When they were temporarily rescinded, construction migrated to Oregon and elsewhere…

While the incentives kept rural Washington sites competitive, the challenge grows in urban locations.

Beyond power costs, the next key cost component and the largest differential is taxes. Washington’s metro areas aren’t competitive on that front, because sales taxes add approximately 10 percent to the total equipment cost per refresh cycle.

In contrast, Oregon has no sales tax. Additionally, the Portland suburb of Hillsboro has invested heavily in communications infrastructure and created an “enterprise zone” offering other incentives to encourage data center investment. Since 2011, it’s estimated that over $1.9 billion has been invested in data centers there, while the Puget Sound region, with a larger population, economy and tech sector, has seen roughly one-tenth that amount. Many of the largest US data center operators, foreign ITcompanies, and end users have already located in Hillsboro.

Extending existing incentives statewide — as House Bill 2673 and Senate Bill 6307 would do — will help stem this tide by making Washington more attractive to the widest range of data center owners, operators and end-users. 

The Associated Press reports that Virginia has been aggressively pursuing the business with tax incentives.

Tax breaks to attract some of the world’s richest companies to Virginia have exploded as the state has become a top global market for data centers.

The Commerce Department report pointed out that Virginia’s promotional material specifically cites Washington’s on-again, off-again history with data center incentives. The report comments,

As Virginia points out, the market abhors uncertainty, and predictable competitive tax incentives are a critical component of the competition between states for data centers.