Operating budget: New taxes, big spending

A billion dollars in new taxes and an 18-percent increase in spending are highlights of the state's biennial budget passed by the Legislature Sunday night -- just 15 minutes before a midnight deadline to adjourn.

As passed by the Legislature, the budget bill appropriates $52.4 billion, an increase of $7.8 billion, or 17.4-percent, over 2017–19. Because of the strong economy, the state was set to receive $50.55 billion in revenue, an increase of nearly 10 percent over the previous budget. Nevertheless, the Legislature added more spending, with taxes to make up the difference. Among the tax increases are an increase in the real estate excise tax (REET).

Not included in this total, however, is E2SHB 2158, which also passed the Legislature and increases appropriations for higher education and career-connected learning (“Workforce Education Investment”) by $393.6 million, funded in part by a 20-percent increase in the B&O tax on many service businesses. Together, appropriations from the regular budget and this new dedicated account total $52.813 billion -- an increase of $8.151 billion, or 18.3 percent, over 2017–19.

A capital-gains tax, often part of the discussion, was not passed by the Legislature. But other taxes were enacted, including new taxes on big banks and vaping products, and a change to the non-resident sales-tax exemption.

Real-estate excise tax

Currently the REET is a flat 1.28%. The Legislature changed it to a graduated rate, such that beginning January 1, 2020, the real estate excise tax is imposed at the following rates:

1 percent if the selling price is equal to or less than $500,000;
28 percent on the portion of the selling price that is greater than $500,000 but equal to or less than $1,500,000;
75 percent on the portion of the selling price that is greater than $1,500,000 but equal to or less than $3,000,000; and
3 percent on the portion of the selling price that is greater than $3,000,000.

A rate of 1.28 percent is imposed on the sale of undeveloped land, timberland, agricultural land, and water or mineral rights, regardless of selling price.

The selling price thresholds are adjusted for inflation every fourth year.

See bill summary here.

B&O tax

The Legislature enacted a three-tiered “surcharge” to fund the new Workforce Education Investment.

A 20-percent surcharge (or tax increase) is imposed on selected businesses based on their primary business activity. Selected business activities include 44 categories of service and other activities, including but not limited to architecture and engineering services, legal services, insurance carriers, financial services, medical services, software publishing, scientific research, electronic shopping, telecommunications services and others.

The second tier of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue of more than $25 billion, but less than $100 billion. The surcharge is 33.33 percent of the total amount of taxes payable by the business on activities taxed under the B&O tax rate for services.

The third tier of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue of more than $100 billion. The surcharge is 66.66 percent of the total amount of taxes payable by the business on activities taxed under the B&O tax rate for services.

See bill summary here.

Spending

For the increase in spending over 2017-2019 levels, K-12 education represents $4.5 billion, or 60 percent, of the increase due to fully implementing McCleary costs and a $937-million increase in special education over 2017-19 levels. Long-term care, developmental disabilities, behavioral health and low-income health care account for $1.5 billion (20 percent), and debt for existing and new capital budgets is $459 million (6 percent).

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For more information, contact AGC Chief Lobbyist Jerry VanderWood, 360.352.5000.