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Kris Johnson | Legislative session focused on spending, taxes

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The 66th Legislature convened Jan. 14 and is slated to end on April 28. During that time, the top job for lawmakers is to craft the state’s two-year operating budget.

The good news is they have record tax collections to work with — more than $50 billion for the 2019-2021 budget cycle.

To put that into perspective, in 2011-2013 the state collected $31.3 billion in tax revenue.

This revenue growth was illustrated in a large display last fall at the Association of Washington Business’s annual Policy Summit. The tallest of the revenue lines was over 6-feet tall. That was the projection for 2021-2023, when state coffers are expected to take in more than $53 billion. At the other end of the chart, the line showing was just over three-and-a-half feet tall.

Based predominantly on the strength of the economy, growing at a rate consistently better than the U.S. average post-recession, the state’s income has surged.

Yet lawmakers are pushing for new and higher taxes this year. Gov. Jay Inslee’s budget proposes $3.7 billion in new and additional taxes, bringing the two-year state budget to $54.4 billion — a more than 22 percent increase in spending over the current budget and a near doubling of state spending in just six years.

Included in his tax proposal: A 9 percent capital gains tax, the largest of eight proposals since 2013; a 67 percent increase in business and occupation tax for service-sector businesses; and, higher real estate excise tax (REET) through a retooling of the current REET structure.

Each of these taxes would hit small-business owners especially hard. The capital gains tax would be particularly painful. That’s because many small-business owners have invested all their savings into their business with the hope of one day selling to fund their retirement. That transaction would be subject to the proposed capital gains tax, eating into the life savings of hard-working entrepreneurs.

The capital gains tax and others are needed, says the governor, because Washington’s tax system is the most “regressive.”

Last July, the Washington Research Council published a report that effectively debunked that myth.

All state and local tax structures are regressive, the Research Council noted, but the overall federal-state-local tax burden ends up being progressive when the federal income tax — which is steeply progressive — is considered. That’s true in every state, including Washington.

By digging into the details of a 2015 report by the Institute on Taxation and Economic Policy (ITEP), which is generally cited as the source for the claim that Washington’s system is the most regressive, the Research Council found two major errors that change the way Washington’s tax system should be regarded.

So while critics like to disparage Washington’s revenue system as an outdated relic, it’s hard to argue with the results it has produced.

Of course, we can always find ways to improve the system and we absolutely should be looking for ways to make it work better for employers and families.

At the same time, we shouldn’t dismiss the parts of the system that are working well and wind up bringing about unintended consequences.

The governor’s budget would reduce the amount of state reserves from $3 billion to $2.8 billion. This time of extraordinary tax growth is the time to build reserves, not draw them down.

As lawmakers consider the governor’s tax proposals and others, we hope they will consider the incredible growth spurt Washington’s revenue has experienced over the last decade and ask themselves the question: Do we really have a revenue problem? Or do we have a spending problem?

 

Kris Johnson is the president of the Association of Washington Business, the state’s chamber of commerce and designated manufacturing association.