Higher state revenue forecast unlikely to resolve budget standoff before end of special legislative session.

Higher state revenue forecast unlikely to resolve budget standoff before end of special legislative session.

(May 29, 2015) Gov. Jay Inslee called legislators back for a second special session today after they failed to resolve the budget impasse in the first special session. The distance between the Republican-dominated Senate and Democratic House is so great that even the 3% increase in the latest revenue forecast did little to bridge the gap over taxes and how to fund education.

TK Bentler, WLA’s government affairs counsel, provided this overview of the key issues going into a second special session:

Is there a need for new taxes or can the budget adequately be funded within current law revenues?
The May 18th Revenue Forecast increased the General Fund State account by $106 million for the 2013-15 biennium and an additional $309 million for 2015-2017. The state also expects more than $100 million extra in federal money for 2015-2017 and potentially an increase in marijuana tax revenue. Republicans say that the new revenues mean there is no need for any new taxes. Democrats disagree. The Governor acknowledged that new revenues mean the size of the tax package that he initially proposed can be scaled back, but he continues to push for new revenues as does House Democratic leadership alleging the Republican budget is unsustainable without additional revenues.

If new revenue is necessary, where should it come from?
During the special session, Democrats focused on two major sources of revenue: a potential capital gains tax on the state’s wealthiest people and a tax/fee on carbon. Republicans adamantly oppose both those sources. Republicans also note their staunch opposition to the increase in the B&O tax on services which was included in the initial House Budget. However, prior to the most recent forecasts, there had been some signal from the Republican leadership that they were willing to consider some of the other, relatively smaller, tax “loophole” changes proposed by Democrats such as the tax on bottled water in exchange for enactment of their “jobs package” which includes extension of some tax preferences for targeted industries.

Funding the McCleary Decision –– Property Tax levies and Teacher Salaries
Both sides are close on the level of appropriation needed to adequately fund education. The biggest difference is that the Senate appropriates less to “catch up” on teacher cost-of-living increases. Greater differences arise from their respective proposals for how to respond to the Supreme Court’s demand that the Legislature address the disparity between rich and poor school districts which results from differing local property tax levy capacity.

Since many districts use local levies to increase teacher pay, the what and how of teacher compensation is also a key negotiating issue. Republicans propose a “revenue neutral” property tax reform package that would lower local property tax levies and raise the state school levy. They would also establish a statewide salary system for teachers with regional adjustments for differential cost of living. Taxpayers in property-rich districts, largely in the Puget Sound corridor could see their taxes increase under that proposal while about 60% of taxpayers would see their property taxes decline.

Democrats oppose the “levy swap,” and instead propose a capital gains tax to raise money for education while further studying how to address the need to equalize funding among rich and poor districts.

Addressing Climate Change – Cap & Trade, Low Carbon Fuel, and the Transportation Budget
The Governor continues to insist that this Legislature must act on his climate change initiative. Republicans have generally opposed taxes on carbon, whether in the form of the governor’s proposed Carbon Pollution Act (CPA) or the Low Carbon Fuel Standard (LCSF). To prevent the Governor from imposing the LCSF by executive order, the Senate’s transportation package included a “poison pill,” which would take money away from transit and other environmental priorities in the transportation budget if an LCSF is imposed. That remains a stumbling block for transportation negotiations.

Though their ideas of a path forward differ from the Governor’s, Democrats in the House and Senate still seem to be pushing hard for some carbon pricing mechanism. The House Appropriations Committee held a hearing on a proposed substitute for HB 1314, the Governor’s carbon pollution market program, but in the face of broad opposition House leadership appears to have put that bill aside. That, in turn, seems to have increased House D commitment to removing the poison pill, perhaps stiffening their support of the low carbon fuel standard.

The Senate proposed a number of transportation system “reforms,” most of which the House and Senate transportation negotiators have been able to work through. But they continue to face a major stumbling block regarding the use of sales tax revenues from highway construction projects. Currently those sales tax revenues are part of the general fund and are relied upon for the operating budget. The Senate shifts those revenues to the transportation budget. The House insists that such a shift cannot be made without identifying an adequate and sustainable source of replacement revenues to keep the operating budget whole. Resolving that issue is essential to reaching agreement on both the operating and transportation budgets.

To avoid a partial government shut-down, Legislators must pass an operating budget before July 1. A second special session convened on May 29 would have to end by June 27. History would suggest that legislators will be unwilling to compromise and unable to conclude their work much before then. But this year there is tremendous pressure to finish before June 12. This is because with the US Open at Chamber’s Bay, legislators cannot count on finding available or affordable lodging near Olympia later in the month and traffic congestion is expected to add hours to their commute times. That may create enough incentive for budget negotiators to quickly reach agreement on the unresolved issues and adjourn in early June.

Negotiators are keeping their cards pretty close to their vest, so it’s difficult to predict what a compromise might look like. However, it is unlikely that the Legislature will adopt any major new taxes, whether a capital gains tax or carbon pollution fee, or increase the B&O tax.

Some new revenue may be brought to the table by allowing some tax “loopholes” to sunset. Negotiators will likely push the property tax levy and teacher bargaining questions forward for consideration next year while reaching a compromise on the amount allocated for teacher cost of living raises. There’s some indication that a compromise could be reached on phasing in a low carbon fuel standard and possibly shifting some portion of future highway construction sales tax revenues to the transportation budget. If not, the transportation package which has been a top priority for the business community for five years could be tabled until 2016.