New Revenues in Washington State Budget

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 tax 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 tax (Washington State does not impose an individual income tax), 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 exemptions and preferential rates.

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

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 tax 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 tax, 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 tax 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.