2019 Post-Session Survey

The recently completed legislative session ended on time April 28, with passage of a $52.8 billion state budget. To support an 18.3 percent increase in biennial spending, lawmakers adopted approximately $1 billion in new and increased taxes

The Legislature also lifted the cap on local property taxes adopted last year, making it possible for school districts to seek voter approval of property tax increases to support local schools. The budget includes increased spending for higher education and financial aid (paid for with increased taxes on service businesses), public employee compensation, mental health, and special education. 

We’re interested in your thoughts on the state budget and legislative session. Thank you for taking a few minutes to complete our brief survey.

Despite increase in state revenues, budget talks likely to go in 2nd special session

Yesterday’s revenue forecasts added more than $400 million to projected funds available to state budget writers. Yet, the two chambers remain far enough apart that most expect negotiations, should they commence soon, will require the governor to call a second special session. 

In the Seattle Times, Joseph O’Sullivan has a good account of where things stand.

The parallel universes Democrats and Republicans have inhabited over the writing of the state’s two-year operating budget don’t seem to be inching closer together.

…Democrats question some of the forecast’s assumptions, including the large amount of marijuana tax money it assumes, and say new revenue is still needed. Meanwhile, a trio of Republican senators argue that the state’s budget situation is so rosy, lawmakers can now cut business taxes.

Handling good news seems to be as difficult as accepting bad news.

But Sen. Andy Hill, R-Redmond and chief GOP budget writer, argued that the new revenue projection weakens Democrats’ case for raising taxes.

“At some point you have to say, ‘Holy cow, we have a lot of money,’ ” said Hill. “We should be able to get this job done very quickly.”

O’Sullivan reports a different reaction from Hill’s House counterpart.

The new revenue forecast “doesn’t completely solve the problem,” said Rep. Ross Hunter, D-Medina, the Democrats’ chief budget writer.

Hunter raised concerns over whether the marijuana tax collections assumed in the forecast will pan out.

The first special session is scheduled to end in nine days, on May 28. The new fiscal year begins July 1. As the Columbian reports,

In Washington, special sessions, although technically meant to be “extraordinary,” are more just, well, ordinary.

Since 2000, lawmakers have held 18 special sessions; some years, there was more than one.

The Spokesman-Review gives the reaction of the state budget director

David Schumacher, director of the Office of Financial Management, said the additional revenue should make it easier for budget negotiators to find a middle ground. If the revenue projections had been this strong last Nov-ember, Gov. Jay Inslee would not have proposed the tax increases for his budget, and House Democrats likely would have had a smaller tax package also, Schumacher said.

The projected revenues from marijuana taxes remain a forecaster’s volatile variable. Nonetheless, in a phrase we don’t like very much, the forecast is what it is – the official number lawmakers rely on to write their budget. The revenue boost should make it easier to get that job done, though probably not by May 28.

Special session starts today; expectations high and muted

Today begins the (first?) 2015 special legislative session. Few expect a swift resolution of the budget stalemate that has taken lawmakers into OT. Some see the extended session as an opportunity to address items that didn’t make the first cut, many of which tie directly to the fiscal/education priorities that will dominate the special.

The Associated Press offers a rundown of must-do items and an inventory of legislation passed during the general. The must-dos:

Legislators’ to-do list for the coming days is weighty. The Democratic-held House and Republican-led Senate must work out their differences on the state budget, education spending and a transportation package or risk, respectively, a government shutdown, contempt penalties from the state Supreme Court, and still more decay and burdens for state transit and roads systems.

The Seattle Times also offers a similar list of things done and left undone

The Times editorial board weighs in with an appeal to lawmakers to meet in the middle, saying some new revenue will be necessary and encouraging lawmakers to “look at” some kind of “small capital gains tax with restrictions.” 

The frequency of these sessions leads the Columbian editorial board to wonder whether it’s time to amend the state constitution to add days to the regular session, currently capped at 105 days in budget-writing (odd) years. The editorial also notes that the philosophical differences between the House and Senate makes a “meet in the middle” resolution difficult to achieve.

Senate Republicans are insistent upon no new taxes; House Democrats are equally adamant that the Senate budget was formed using smoke and mirrors. That would seem to leave little room for the kind of compromise that will be required.

Meanwhile, as we posted yesterday, the state Supreme Court wants to know how lawmakers satisfy the McCleary mandate.  The Attorney General asked the court to allow the Legislature to finish the job in the special session. The Walla Walla Union-Bulletin seconds the request.

Lawmakers have been serious about the need to boost education funding since lawmakers went into session in January. The plan, as of now, is for the Republican-led Senate and the Democrat-controlled House to make substantial progress during the 30-day session that starts Wednesday. Lawmakers are also expected to address the unconstitutional use of local school district levies.

…The court needs to give the legislative branch and the executive branch the time needed to meet constitutional responsibilities.

And if that goes beyond the special session, the court must wait…

As must we all.

State revenues continue to grow slightly ahead of forecast

A little more good news for state budget writers came in the latest monthly revenue report from the Economic and Revenue Forecast Council.

Major General Fund-State revenue collections for the March 11 – April 10, 2015 collection period were $39.4 million (3.7%) higher than the February forecast. Much of this month’s surplus was due to a $21 million refund that was expected during the period but has yet to occur.

Had the refund happened as expected, collections would have been only $18.4 million (1.7%) higher than forecasted. Cumulatively, collections are now $56.1 million (2.7%) above the February forecast. Adjusted for the still-expected $21 million refund, the cumulative surplus is $35.1 million (1.7%).

The Washington Research Council post on the report is here.

Getting to “fair”: understanding tax burdens and the policy implications

The Pew Foundation recently reported the results of a poll testing the public’s view of the federal tax system. Unsurprisingly, most people don’t like it much.

The public sees the nation’s tax system as deeply flawed: 59% say “there is so much wrong with the federal tax system that Congress should completely change it.”

More surprisingly, though …

Just 27% are bothered “a lot” by the amount they pay in taxes. By contrast, 64% say they are bothered a lot by the feeling that some corporations do not pay their fair share of taxes, and 61% say the same about some wealthy people failing to pay their fair share.

Maybe that’s not so surprising considering the inequality drumbeat. Pew writer Drew De Silver, a former business reporter for the Seattle Times, provides some context, including noting the blurry lines between business and personal income taxes given the various ways businesses are organized. Also, this:

In 2013, according to our analysis of preliminary IRS data, people with adjusted gross incomes above $250,000 paid nearly half (48.9%) of all individual income taxes, though they accounted for only 2.4% of all returns filed. Their average tax rate (total taxes paid divided by cumulative AGI) was 25.6%. By contrast, people whose incomes were less than $50,000 accounted for 63.4% of all individual income tax returns filed in 2013, but they paid just 6.2% of total taxes; their average tax rate was 4.2%.

This may or may not be “fair.” But it is progressive. 

Which brings us to today’s installment of the KPLU series on state tax policy, which looks at tax exemptions. Most of them benefit individuals.

KPLU pie

 

Just a small slice of that pie represents business tax incentives. While lawmakers often look to the exemption lists as a source of potential new money, it’s not that easy, KPLU reporter Kyle Stokes writes.

But ending tax exemptions is no simple way to generate new revenue. End the most lucrative sales tax exemptions — such as on food, drugs or services — and individuals will feel it. But ending tax breaks or preferential rates for businesses has its perils, too.

“What a lot of academics will tell you is that, ultimately, people pay taxes,” said Dick Conway, a regional economist who has argued for an income tax in Washington state.

The reason is that businesses dealing locally easily pass along any tax increase to their customers, a phenomenon the Washington State Tax Structure Study Committee noted in its 2002 report

On the other hand, Conway worries about the impact of increases on larger corporations based in Washington state. He says the fear with increasing Boeing’s tax burden, for instance, is that the company would either move jobs away or wouldn’t be able to keep up with their competition, Airbus. Either scenario hurts Washington state’s economy, and, in turn, individuals.

Something to think about when the House budget is unveiled tomorrow.

Taxes influence behavior – evidence from cigarettes

Here’s something that’s easily overlooked. When sin taxes get too high, sinners figure out a way to beat the system. 

Melissa Santos writes in The News Tribune about cigarette taxes. 

Washington state has steadily raised its cigarette taxes in the last 20 years as a means to both curb smoking and raise revenue.

At the same time, though, something else has gone up: The rate at which people evade the tax by buying cigarettes out of state or online.

Nearly one-third of Washington’s potential cigarette tax revenues were lost to smuggling or tax evasion in the 2013 fiscal year, according to estimates by the state Department of Revenue.

It’s a nicely researched article, underscoring the tale of diminishing returns. 

Tax evasion is a crime. But taxation does influence behavior in other, legal, ways. High business taxes, for example, can cause industry to relocate or expand in more tax friendly jurisdictions. It’s not just the sinners that understand the system.

WTO questions Washington state tax policies, alleges unfair Boeing subsidy: A teachable moment for policymakers

The World Trade Organization has announced that it will look into Washington state’s aerospace tax incentives, at the request of the European Union (Airbus). The policies adopted in November 2013 have been repeatedly and mistakenly characterized as an $8.7 billion subsidy, a claim nicely debunked in this Washington Research Council report.

The WTO will, naturally, do its own homework. But the charge provides an opportunity to revisit the role played by tax policy in stimulating business activity, creating and retaining jobs, and avoiding distortions like double taxation of commercial transactions.

Washington taxes fall heavily on business, much more so than in most other states. In the Opportunity Washington research report, we wrote:  

Like all states, Washington has adopted tax policies that lower rates and make adjustments to the economic activity being taxed for specific purposes and activities. In addition to the four major Business and Occupation (B&O) tax rates, there are a number of specialized B&O rate classifications designed for different industries. Similarly, the sales tax base has been defined to exclude certain types of transactions, such as food purchases and purchases of various personal and professional services. These adjustments generally promote specific public policy objectives. The business tax burden would be considerably higher — and the state less competitive in attracting and retaining these types of businesses — were it not for such policies.

Although some of the modifications are designed as incentives to promote a specific type of business investment, others are designed to offset disincentives to economic development or competitive inequities that our tax system would otherwise create. (Such disincentives and inequities exist in all state and local tax systems, but they are particularly prevalent in a system like Washington’s that relies heavily on business taxes relative to other states.) In this way, the policies perform a special role in normalizing the tax structure and maintaining a level field of competition.

Additional Washington Research Council reports examine how certain tax policies level the playing field, promote research and development, and explain why the great majority of perceived “breaks” survive our state’s careful review of their effectiveness. 

The EU and WTO may be slow to understand. But it’s very important that policymakers in Olympia get this right.

Changing the rules on tax incentives in Olympia: What message do lawmakers want to send?

The House Labor Committee has scheduled a 1:30 hearing on HB 1786. The bill analysis gets into some background and detail. Jerry Cornfield’s story in the Everett Herald hits the key points.

Aerospace companies that save millions of dollars through tax breaks — or billions in the case of the Boeing Co. — could face new rules if they want to keep them.

A group of House Democrats are pushing to set a minimum wage of more than $20 an hour for veteran employees of those firms and to shrink the tax break for the Boeing Co. if the firm cuts its job force too much.

As Cornfield reports, more is in the works.

A second bill, which could become public this week, will target Boeing. As drawn up, the company would have its tax break reduced if it trims its workforce in the state by a certain number of jobs. Rep. June Robinson, D-Everett, is expected to be the prime sponsor.

Read the whole story, it’s good reporting. Here’s how HB 1786 would change the rules.

Each September, the companies would report the annual earnings of each employee who has been with the firm for three or more consecutive years. As written, the bill covers all jobs including assemblers and engineers, executives and janitors.

Under the bill, each of those employees must be paid at least the state median wage for a one-earner family as reported in the American Community Survey by the U.S. Census Bureau. That wage is currently $52,384 a year.

This mandate is phased in over three years. Starting in 2016, workers must be paid at least 80 percent of this year’s median wage or $41,900, which works out to $20 an hour for a full-time worker. Workers must make 90 percent of the median in 2017 and 100 percent by the start of 2018.

If one employee does not earn the standard in any year, the company loses its entire tax break, according to the bill. A firm can get it back the following year if it complies.

We noted earlier today the importance of manufacturing to our state. A Washington Research Council report last year put the Boeing incentive package in context, dubbing it a mythical $8.7 billion tax break. 

Cornfield’s story closes with the Everett mayor asking the right question.

Everett Mayor Ray Stephanson said he couldn’t comment on the specifics of either bill yet, because he has not seen them. If lawmakers impose new conditions on receipt of the tax breaks, it could quiet the interest of any firms eyeing a move to the city or state, he said.

“I think the risk is this: What kind of message does it send to other companies that you’re recruiting to your state?” he said.

The question answers itself, but as KPLU reports, The Boeing Company provides a clear answer.

“The 2013 incentives require Boeing to build the 777X exclusively in the state — an unprecedented safeguard for taxpayers,” the company said in the statement. “Changing the legislation undermines the confidence of all businesses that the state will honor its commitments.”

Right.