State shouldn’t wait to fix COVID budget problems | Guest Opinion

Facing a $4.5 billion reduction in forecasted revenue (nearly $9 billion over the three years), it seemed inevitable that a special session would be called to help rebalance the state’s budget. As a reminder, Washington’s current 2019-21 budget is $53.3 billion. This level of spending is $8.6 billion, or 19% higher, than the 2017-19 budget.

With the Governor refusing to call a special session to adjust the planned spending increases before the new fiscal year started on July 1, however, the odds are now increasing that lawmakers may wait until next January to address the budget. Delaying further will make the necessary changes much harder to implement.

Sure enough, current reports from the Governor and legislative leadership is that no special session will be called anytime soon. Instead of acting now and enacting savings over a 12-month period, the current budget plan in the state appears to be spending down the reserves and trying to cram all the savings into the remaining six to three months of the budget. Or, massively increase taxes (yet again).

There is the legal question if the Governor can really wait to act. State law (RCW 43.88.110 (7)) requires the Governor to issue across-the-board budget cuts if a cash deficit is projected. This is exactly what former Governor Chris Gregoire did in 2010 when complying with the law.

Our friends in California have already acted to address their budget problem. In late June, lawmakers in California sent Governor Newsom a budget that reduced spending, including a 10 percent reduction in pay for state workers and canceling pay raises that were scheduled to take effect in July.

There continue to be bipartisan calls in Washington for immediate budget action.

Washington state Treasurer Duane Davidson (R) recently said, “I contend that a call for an emergency legislative session should take place as soon as possible to see what the Legislature can do. This type of severe budget reduction traditionally derives from legislative action rather than such unprecedented executive order as we are seeing now.”

Rep. Mike Chapman (D-Port Angeles) told me: “I have asked the Governor to call a special session. I had hoped to have one before additional spending started in July. I am now supporting an early August special session to address the budget shortfall and economic distress throughout our state, especially in rural districts like mine.”

Predictably, discussion of a capital gains tax is occurring with greater frequency in response to the budget outlook. There is one piece of information that is consistently left out, however: the fact that a capital gains tax is an income tax. This important detail dramatically changes the political and legal framework for the debate.

On the political side is the fact the voters have rejected 10 straight income tax proposals, including six proposed constitutional amendments. On the legal side is the fact a graduated income tax would require a constitutional amendment.

There is near universal agreement that adopting a constitutional amendment to allow a graduated income tax is extremely unlikely. So what is the motivation with these perennial proposals for a capital gains income tax?

Let’s see what the advocates of the tax proposal say.

Sen. Jamie Pedersen (D-Seattle) was recently quoted in an interview saying: “Republicans and Jason Mercier and company have been agitating for years that a capital gains tax is an income tax, and expressing horror and disbelief that anyone could claim that it’s not an income tax. That’s not actually the question. We don’t care whether a capital gains tax is an income tax because an income tax is not something that shows up in our constitution.”

What does show up in our state constitution is one of the broadest definitions of property in the country. Interpreting this language, Washington’s state Supreme Court has consistently ruled that income is property (meaning, you own it). This is why a graduated income tax has been prohibited without a constitutional amendment and a tax on income must conform with the constitutional restrictions on property taxes.

As for those who unequivocally says a capital gains tax is an income tax, I’m in good company. Every state in the country and the federal Internal Revenue Service (IRS) agree.

According to the IRS: “This is in response to your inquiry regarding the tax treatment of capital gains. You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

Whether or not the advocates of this tax proposal care that it is an income tax, this fact is not in dispute anywhere outside of Washington state.

Finally, some context on the current budget outlook. During the great recession, 2009-11 spending was actually reduced below 2007-09 levels. No matter what happens when lawmakers next act, the 2019-21 budget will still likely be higher than the 2017-19 budget due to the current 19% increase in spending.

It is also important to remember that even with the forecasted $9 billion reduction in revenues, funding is still projected to increase overall. According to the state’s June revenue forecast: “Near GF-S revenues expected to grow 3.7% between the 2017-19 and 2019-21 biennia and 7.4% between the 2019-21 and 2021-23 biennia.”

During the great recession, however, revenues were actually 5.5% less in 2009-11 from 2007-09 levels. This is not to say the current problem will be easy to fix but it is a different problem to reduce spending increases versus re-basing a budget below the prior biennium spending levels.

Government restrictions shutting down the state’s economy for several months have drastically reduced the expected rise in tax collections. This economic problem occurs at a time of significant state spending increases over the last few years.

Using the state’s current emergency reserves and requesting federal officials to provide flexibility for CARES Act funding would help solve part of the budget deficit. State officials also need to take action to reduce new spending increases. It is important these reductions happen while avoiding tax increases that would further burden families and employers as they try to recover from the government-imposed, pandemic related economic restrictions.

The time to act is now..

This story was originally published July 16, 2020 at 12:18 PM with the headline "State shouldn’t wait to fix COVID budget problems | Guest Opinion."