Inslee dusts off capital gains tax, proposes new tax on insurance plans to fund public health

As he prepares to begin a third term in office, Washington Gov. Jay Inslee is proposing a new tax on health care premiums to fund post-pandemic public health. He’s also once again urging the Legislature to pass a capital gains tax.

The tax measures are contained in Inslee’s two-year, $57.6 billion operating budget proposal released Thursday in advance of the 2021 Legislative session. Separately, the Democratic governor also released proposed capital construction and transportation budgets.

It’s tradition for the sitting governor to unveil budget proposals in December. But the job of actually writing and passing the budget ultimately falls to the Legislature.

Still, the governor’s budget blueprint serves as an important statement of values and as a roadmap for lawmakers who will ultimately need his signature on the final spending plan.

With a “Beyond the Pandemic” theme, Inslee’s budget is focused on economic relief and recovery, and making investments in key areas like homelessness and child care.

In the short-term, and apart from the budget, Inslee is urging lawmakers to quickly pass a COVID pandemic relief package in January to provide $100 million more in grants to businesses hard hit by closures and another $100 million to help tenants and landlords.

Longer-term, the formal, two-year spending plan includes money to address an ongoing backlog of people waiting for unemployment insurance benefits, dedicated spending to help students catch up after months of remote learning and funding for struggling child care providers.

Besides addressing the fallout from the pandemic, Inslee’s spending plans also focus on racial justice.

“The governor’s budgets demonstrate his commitment to equity and inclusion by funding programs and policies that work to eliminate racial disparities,” said a summary of the budget.

For instance, included in the budget is funding for a state equity office and to create a new state office for police accountability.

Overall, Inslee’s 2021-2023 operating budget would spend nearly $5.5 billion more than the current budget. To fund the budget, Inslee would tap the state’s budget stabilization account, also known as the “rainy day” fund, and enact roughly $1.3 billion in taxes.

In addition to the capital gains and health care insurance tax, Inslee is proposing to narrow what he called a “bad debts” loophole that allows businesses to write off some of their business and occupation and sales tax liabilities.

Once again, Inslee wants the state to enact a nine percent tax on capital gains earnings above $25,000 for an individual or $50,000 for a couple with a goal of bringing in $1.1 billion in 2023 and $2.4 billion in the 2023-25 budget cycle. Inslee’s office estimates that about 2 percent of Washington households would pay the tax in the first year. While the capital gains tax enjoys broad support among majority Democrats in the Legislature, it has nonetheless faced tough going, especially in the state Senate.

It’s not clear if the 2021 Legislature will be more open to the idea. But if it did pass, the new tax would almost certainly face a legal challenge from opponents who maintain that it’s a form of income tax prohibited by the state constitution.

Inslee’s budget calls for spending the “rainy day” fund first and then replenishing it with the proceeds of the capital gains tax when that money starts to kick in.

The new proposed tax on health insurance plans would be a per member, per month tax designed to raise $205 million in fiscal year 2023 for public health. The governor’s budget office estimated the tax would be about $3.00 per month for an individual.

Even before the budget rollout, minority Republicans in the Legislature were critical of any effort to raise taxes in 2021 – noting the state’s revenue picture has improved, not worsened, with each quarterly revenue forecast since the start of the pandemic.

“We don’t need new taxes,” said Senate Republican Leader John Braun in an interview earlier this month on TVW’s “Inside Olympia program. “I just think it’s tone deaf and, frankly, not responsible to do that given all the other challenges our businesses are facing and our communities are facing around the state.” But Inslee views the state’s budget situation differently, citing a $3.3 billion drop in anticipated revenues since the start of the pandemic along with demands for new spending brought on by the public health crisis.

“While Washington’s budget picture has improved since spring, the state still faces significant fiscal challenges,” Inslee’s budget brief said.

Other spending priorities include:

• Improving special education services
• Hiring more Child Protective Services workers to reduce child welfare caseloads
• Continuing to fund the Washington Immigrant Relief Fund
• Expanding youth mobile crisis teams statewide
• Establishing a system to track police use of deadly force on a statewide basis
• Funding a new state Capitol Campus Childcare center now under construction

The budget does not contemplate state employee pay raises during the 2021-23 budget cycle and would save money by requiring most employees to take 24 unpaid furlough days over the two years.

The governor also seeks to save money by reducing the amount of time people spend in state prisons. He would do this in part by allowing most prisoners to earn up to one-third off their sentences and have that credit also apply to sentence enhancements.

In addition to the operating budget, Inslee is proposing a “extra-large” $6.2 billion capital construction budget to help jumpstart the post-COVID economy. A key focus would be on addressing a backlog of construction projects on community college and university campuses with the goal of putting 36,000 people to work.

The governor’s transportation budget prioritizes the ongoing process of removing salmon and steelhead blocking culverts as required by a 2013 federal court injunction. The 2021-2023 transportation budget would spend $724 million to fund 114 culvert replacements and design 136 more.

In announcing his budgets, Inslee noted that Washington remains in the midst of a public health and economic crisis that is likely to last several more months. Compared to March, employment in the state is still down 217,000 jobs. Inslee’s budget summary packet included a chart that compared 2020 job losses to those of previous recessions. Whereas the past job losses were u-shaped, the 2020 graph is represented by a sharp, cliff-like decline of nearly 12 percent, followed by a partial v-shaped recovery.

The end of 2020 will also mark the end of the CARES Act relief program. Washington will have spent $2.1 billion in federal funds to help with pandemic response. While Congress appears to be inching toward passage of another relief package, state officials do not expect it will include unrestricted funds that would help Washington address its operating budget needs.