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New Revenues in Washington State Budget

3 min readBy: Brandon Lecoq

With the clock ticking, Governor Jay Inslee (D) called the Washington State Legislature into its third and final special session on June 28th to determine the budget for the next biennium. The budget includes many important changes in the state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code.

Although the Office of Financial Management projected revenue growth in the absence of any tax increase, new education funding mandates and the Governor’s legislative priorities drove debate over additional revenue options. Under the Washington Supreme Court’s McCleary decision, legislators were obligated to increase overall education funding levels in the coming years. Compounding this funding obligation was ballot initiative, I-1351, which mandated smaller class sizes at a cost of $2 billion over the biennium not mandated by, and not fully addressed by, the state’s obligations under McCleary.

Throughout the regular session and into the first special session, Governor Inslee and his legislative allies championed a capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. (Washington State does not impose an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. ), which, in its final version, would have been levied on capital gains exceeding $25,000 per annum. Sensing dwindling opportunity to reach an agreement including capital gains taxation, however, House and Senate leadership agreed on the outline of a deal in which House Democrats dropped the capital gains tax proposal in exchange for Senate Republican support for eliminating a number of tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. s and preferential rates.

The following table details some of the new revenue raisers included in the new budget.

2013-2015 2015-2017 2017-2019
Marijuana Regulation $6.9 $14.8 $41.3
Out-of-State Wholesaler Nexus $45.4 $98.3
Online Click-Through Nexus $28.3 $35.3
Increased Late Payment Penalties $23.0 $25.0
Repeal M&E Sales Tax Exemption $57.2 $70.7
Repeal B&O Exemption for Royalty Income $31.4 $37.5
Public Works Assistance Account Transfer $73.0 $73.0
Tobacco Settlement Account Transfer $51.4

Governor Inslee signed the operating budget, funding $1.3 billion for K-12 education, reducing tuition to the University of Washington and Washington State University by 15 percent and other regional universities by 20 percent. The table above outlines the greatest revenue raisers which includes account transfers, elimination of certain tax exemptions, and new tax policy. Among the notable changes—

  • Marijuana Regulation: HB 2136 eliminates the 25 percent producer and processor taxes while increasing the retailer tax to 37 percent. You can read more about Washington’s marijuana reform here.
  • Nexus for Out-of-State Wholesalers: This policy, as part of SB 6138, extends the Business & Occupation (B&O) gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. to wholesalers with more than $267,000 in receipts in Washington State but have no physical presence within the state.
  • Online Click-Through Nexus: This policy requires online wholesalers with receipts exceeding $267,000 to collect Washington’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , even if the company lacks physical presence in the state.
  • Elimination of manufacturers’ sales tax exemption: Washington State has repealed the sales and use tax exemption for machinery and equipment—including “canned” software—used in manufacturing and R&D operations.
  • B&O Tax preferential rate repeal: the current, lower 0.484 percent B&O tax rate on royalty income has been eliminated in favor of the general rate.
  • Gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase: Governor Inslee has yet to sign the transportation package (ESSB 9877), which would raise the gas tax by 11.9 cents per gallon over two years.
  • Transfers: Over the next biennium, $178.1 million of the budget will be funded through transfer payments, chiefly from the Public Works Assistance Account and Tobacco Settlement Account.
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