Senate considers capital gains tax to pay for tax breaks

OLYMPIA, Wash. — Senate Democrats released a two-year state budget proposal Friday to increase spending on education and mental health and have included a stand-alone option for a capital gains tax that, if adopted, would pay for a series of tax breaks.

Senate leaders unveiled their plan on the same day the House was expected to vote on its own budget proposal. Both Democratic-led chambers are moving through the process of passing their own proposals before moving to negotiations on a final budget plan.

The Senate plan seeks more than $500 million in new revenue to fund the underlying $52.2 billion budget, including a change to the state's real estate excise tax, which House Democrats are also seeking.

While a capital gains tax was also unveiled by Senate Democrats Friday, it is not assumed as part of the revenue needed to pay for the underlying budget. If adopted, it is expected to bring in $780 million in its first year and would fund several tax breaks starting in 2021: a tax credit for low-income families, a tax cut for small businesses, and increasing the number of seniors who are eligible for a property tax reduction. It would also fund the elimination of the sales tax on diapers, medical and mobility equipment, feminine hygiene products, and over-the-counter medications.

The proposal would levy an 8.9 percent capital gains tax on earnings from the sale of stocks, bonds and other assets above $250,000 for both individuals and those who file jointly. Retirement accounts, small businesses, homes, farms and forestry would be exempt.

House Democrats also sought a slightly different capital gains proposal as part of their overall $1.4 billion revenue package unveiled earlier this week.

Opponents of a capital gain tax have argued that it's a type of income tax illegal under state law and litigation is likely if the Legislature approves the tax.

Senate Majority Leader Andy Billig, D-Spokane, said at a press conference announcing the budget proposal that while he's not yet sure they have the votes for a capital gains tax, he still considers it a viable option this year.

"It's more than the responsible thing to do, it's an imperative that we rebalance our tax code and make sure that we're helping our state to move forward in a way that reduces that tax burden on middle class and low-income families," he said. "That's the priority."

For the underlying budget that increases spending on K-12 education, higher education and behavioral health, Senate Democrats are relying on three main revenue options, including the real estate excise tax, which is estimated to bring in about $421 million through mid-2021.

Currently, all property sellers pay a flat 1.28 percent rate. Under Senate Democrats' proposal, the rate remains the same for homes that sell between $250,000 and $1 million. But the rate increases to 2 percent for sales valued between $1 million and $2 million, and increases to 2.5 percent for sales of more than $5 million. For homes that sell for less than $250,000, the rate is reduced to .75 percent. The House version, which is structured differently, would bring in about $130 million in the next two-year budget.

The Senate plan also looks to repeal or amend three current tax exemptions, including the current sales tax break for residents who live in states that don't have a sales tax, like Oregon. Under the Senate plan, non-residents would be able to request sales tax refunds of more than $25 and would be limited to one refund per year.

To pay for wildfire costs, Senate Democrats are also seeking an increase in the tax on car, property and casualty insurance premiums. The rate would increase from 2 to 2.52 percent, bringing in $125 million to state coffers over the next two-year budget.

In a written statement, Sen. John Braun, the budget leader for Senate Republicans, said that while he thought the Senate Democrat's approach was a better start than the House's "the tax increases in the proposed Senate budget are still unnecessary, and the spending is higher than necessary."

The Senate is scheduled to have a public hearing on its budget plan on Monday, and is expected to have a vote of the full chamber later that week.