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The House Revenue Plan Shows How to Make Smart, Long-term Investments in Communities

Posted by Kelli Smith at Apr 14, 2017 03:15 PM |
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By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst
 

The package of tax reforms included with the budget proposal from Democratic leaders in the Washington state House of Representatives would provide nearly $3 billion in the coming 2017-19 budget cycle in equitable, ongoing resources for schools and the other foundations that foster thriving communities. Because of these important reforms, the budget proposal from House Democratic leaders is the only sustainable two-year investment plan currently under consideration in Olympia. The House’s plan would also begin to take important steps toward flipping Washington’s inequitable, upside-down tax code right-side up.

While Republican leaders in the state Senate also have a budget plan, it does not take meaningful steps toward cleaning up the state’s flawed tax code, and it pencils out only with the help of unsustainable accounting tricks, harsh cuts to critical state programs, and empty promises to our kids.

Washington state has the most upside-down tax code in the nation. Families with middle and low incomes pay up to seven times more in state and local taxes as a share of their incomes than the wealthiest 1 percent. The House Democrats’ proposal shows that it doesn’t have to be this way. The revenue package they propose would raise resources to invest in the foundations that let us all thrive, and it would do so equitably and sustainably by beginning to clean up the tax code so that everybody pays their share. Here’s how they would do it.

Closing the tax break on profits from the sale of high-end capital gains ($715 million in 2017-19). Every year, Washington leaves hundreds of millions of dollars on the table by giving a tax break to those who profit when they sell their corporate stocks and bonds. House Democratic leaders propose to eliminate this tax break by enacting a new tax on capital gains – profits on the sale of corporate stocks, bonds, and other financial assets – above $25,000 ($50,000 for married couples) at a rate of 7 percent. If our state joined the 42 other states that tax capital gains, as the House proposes, we could instead put those resources into the foundations that help our communities flourish, such as recruiting the best educators to teach Washington’s kids and maintaining the beautiful state parks we all enjoy. The tax would not be levied on common middle-class investments. Capital gains within retirement and college savings accounts would be exempt, along with those from the sale of family homes, timberland and farmland, timber, livestock, and small business assets. 

Curtailing or eliminating wasteful tax breaks ($144 million in 2017-19). Washington’s tax code is riddled with tax breaks, some of which are outdated, and others of which only benefit the powerful few who have manipulated the tax code in their favor. Limiting or closing some of the most wasteful tax breaks would begin to clean up our tax code and turn it right-side up. The House Democrats’ plan would allow our state to put resources to good use in our communities instead of providing giveaways to special interests. The plan proposes to close the following breaks: 

    • Sales tax break on bottled water. The negative impacts of bottled water on our environment are well documented, so there’s no good policy rationale to incentivize the purchase of bottled water by providing a tax break for it. Under this proposal, the tax break on bottled water would remain in place for those who don’t have access to potable water. 
    • Sales tax exemption claimed by oil refineries on fuel used to power their operations. This exemption was originally enacted to help the timber industry when companies used their own “hog fuel” in their operations, but now this break goes almost exclusively to the big oil industry.
    • Preferential business tax break for international investment management companies. Financial firms in the business of managing international investments receive a preferential business tax rate which is less than one-fifth the general rate paid by other service businesses, such as janitors, dentists, mediators, and optometrists. 
    • Preferential business tax breaks for prescription drug wholesalers. The tax break for prescription drug wholesalers was originally put in place to lure businesses to Washington state. But because the exemption is available even to companies that aren’t located in our state, it provides no competitive advantage for our state.
    • Real estate tax exemption claimed by banks on sales of foreclosed homes. When Washingtonians buy a home, they pay a real estate excise tax (REET). But when a piece of property is sold as part of a debt proceeding, such as a foreclosure, the REET is not applied. Closing this break would put investors and banks that buy up foreclosed homes on equal footing with everyday homebuyers.
    • Sales tax giveaway for out-of-state shoppers. Our state currently allows shoppers who come from no- or low-sales-tax states to shop in Washington without paying our sales tax. The original purpose was to encourage shoppers in border counties to choose to shop in Washington instead of going across the border to avoid sales tax. But the data shows that this break is claimed most often in King County, which isn’t a border county – strong evidence that the break is being wasted on tourists who would shop in Seattle anyway. The plan from House Democrats would convert this to a rebate program, under which qualifying shoppers could apply once a year to have their sales tax reimbursed. This change from an automatic break to an application process would shrink the sales tax giveaway significantly.

Reforming business taxes ($1.2 billion in 2017-19). The House proposal would eliminate business & occupation (B&O) taxes for about 260,000 small businesses in Washington state with annual gross business incomes below $250,000. Another 33,000 small businesses with between $250,000 and $500,000 of gross income would be able to reduce their tax bills by exempting their first $100,000 in income from the B&O tax. In addition, a 20 percent B&O tax surcharge would be applied to a broad range of businesses categories, mostly impacting larger businesses. This reform would not only help small businesses by providing a targeted B&O deduction, but it would generate over $1 billion per budget cycle in new resources for schools and other priorities.

Reforming the 1 percent property tax levy growth limit ($128 million in 2017-19). As we’ve written about in the past, the 1 percent levy growth limit artificially holds down state and local property tax revenues. The cap starves communities across our state of the resources they need to maintain basic services, like providing 24-hour police and fire services. Lifting this limit would allow towns and cities, especially those in small and rural communities, to raise resources in a way that allows them to meet essential community needs.

Creating a more equitable Real Estate Excise Tax ($435 million in 2017-19). Under current law, a flat, 1.28 percent REET is applied to the total selling price of most real estate sold in Washington state. This proposal would change the tax from a flat rate to a progressive rate, resulting in a higher rate for the very highest-valued properties, and a lower rate for the lowest-valued properties. This would help create a more equitable tax code by requiring those who can afford to buy properties worth more than $1 million to pay a little more to support schools and other important community investments. 

    • For properties selling for less than $250,000, the rate would be reduced to 0.75 percent. 
    • For properties selling for between $250,000 and $1 million, the rate would remain at 1.28 percent. 
    • For properties selling for between $1 million and $5 million, the rate would be increased to 2 percent. 
    • For the most expensive properties – those selling for more than $5 million – the rate would be increased to 2.5 percent.

Creating a more level playing field between in-state and out-of-state retailers ($330 million in 2017-19). Because of a United States Supreme Court decision, many out-of-state internet retailers are not required to collect sales taxes on purchases made to Washington state residents. While these retailers can voluntarily collect sales taxes, few have chosen to do so. As a result, Washington communities lose out on hundreds of millions of dollars in resources, because our state doesn’t receive sales tax revenue on a significant portion of purchases made by Washingtonians. House Democrats propose to follow actions taken by Colorado and other states that would encourage these businesses to change their ways and start collecting sales taxes on goods sold to Washingtonians. Under their plan, out-of-state businesses that choose not to collect sales taxes would be required to send information on each taxable sale to their customers (and the state Department of Revenue). Then the onus would be on the customers themselves to pay the sales taxes not collected by the company. If enacted, many businesses would choose to simply start collecting the taxes rather than placing that responsibility on their customers. 

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