Revenue forecast prompts GOP leader to call for tax rollback; also, concerns about banks’ lawsuit.

With a slight upturn in the state’s revenue forecast has come increased discussion about what the change implies for the 2020 legislative session. There are, as always, opportunities and risks to consider.

Senate Republican leader Mark Schoesler, R-Ritzville, sees an opportunity for tax relief

“We said all along that tax hikes weren’t necessary, but the governor and his allies in the majority apparently felt our Main Street employers were undertaxed, and they went ahead with this huge increase,” Schoesler, who is a member of the Senate Ways and Means Committee, stated. “I think the Legislature needs to acknowledge that there is already plenty of revenue coming in, and realize it’s time to listen to the taxpayers and rescind the B & O tax hike.”

Washington Research Council analyst Emily Makings reports on a recent Ways and Means hearing that identified concerns.

More reasons for caution were discussed at a Ways and Means Committee work session yesterday, related to revenue bills enacted earlier this year:

  • A lawsuit has been filed regarding the constitutionality of SHB 2167 (which imposed an additional 1.2 percent business and occupation tax on certain financial institutions). The new tax was expected to increase revenues by $133.2 million in 2019–21 and $205.6 million in 2021–23. If it is found to be unconstitutional, those revenues would not be realized.
  • The revenue estimate for E2SHB 2158 (which imposed a business and occupation tax surcharge on certain businesses to fund higher education) was reduced by $172.5 million in 2021–23 after the bill was passed by the Legislature (but before it was signed by the governor in May). (Our report on the revenue changes made during the session includes the current number.)
  • The new tax on vapor products (E2SHB 1873) was expected to increase revenues to funds subject to the outlook (NGFO) by $1.4 million in 2019–21 and $1.5 million in 2021–23. (Another $17.7 million in 2019–21 and $33.5 million in 2021–23 were expected in non-NGFO accounts.) But in September, the State Board of Health banned flavored vapor products for 120 days (and that emergency rule was later expanded to include a ban on vapor products containing vitamin E acetate). According to Ways and Means staff, a new fiscal estimate assumes the flavor ban will become permanent and that health concerns will continue to dampen the market for the products, meaning that “over 95 percent” of the four-year estimate is now not expected to be collected.

We wrote about the lawsuit previously. The Everett Herald editorial board reviews the scant legislative history of the tax hike and writes, “haste makes lawsuits.”

The legislation had about 55 hours of vetting that included quickly called testimony in hearings, limited floor debate and scant opportunity for the public to comment on whether the tax increase on banks would be a good idea. Notably, the legislation was adopted before the Department of Revenue could issue fiscal analysis that lawmakers typically consider before voting on a bill; that analysis — which estimated revenue of more than $1.033 billion between now and 2029 — wasn’t available until the day after the Legislature adjourned…

The hastily passed tax increase appeared to be a last-minute move to piece together a revenue package that would fund the $52.4 billion budget the Legislature wanted to pass before the regular session’s end, in particular, after Democrats couldn’t gather enough support among themselves for a capital gains tax.

At Crosscut, Melissa Santos also reports on the lawsuit.

The lawsuit, filed earlier this month in King County Superior Court, argues that passing bills in this manner is indeed a constitutional violation, despite being an “open and notorious practice by Washington legislators.”

“Unconstitutional practices are not made constitutional just because they have been carried out for a period of time and not challenged in court,” said Rob McKenna, a former Republican state attorney general who is representing the banking associations as an attorney in private practice.

More,

State Sen. Mark Mullet, D-Issaquah, was one of five lawmakers who requested that Inslee veto the bank-tax bill in May.

Because the bill appeared on the Friday before the weekend when Legislature was scheduled to adjourn, Mullet said he was unable to get a legal analysis from the state Attorney General’s office before the measure came up for a floor vote.

Mullet said he worries that since the measure was tailored to affect only banks that are based outside of Washington, it could run afoul of the commerce clause of the U.S. Constitution, which he said exists to ensure that in-state and out-of-state businesses have “a level playing field.”

The revenue forecast, ultimately, represents a very slight change in the state’s fiscal outlook. Nonetheless, self-inflicted procedural wounds, an uncertain economic outlook, and policy changes underscore the importance of exercising fiscal restrain in the next legislative session.