Second lawsuit challenges capital gains tax;
State revenues again come in ahead of forecast.
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As expected, last week the second lawsuit was filed challenging Washington's new, controversial capital gains tax. You'll recall the first challenge was filed even before the governor had signed the legislation. Former state Attorney General Rob McKenna, now an attorney with Orrick Herrington & Sutcliffe LLP filed the suit. The Opportunity for All Coalition initiated the challenge, plaintiffs include several state residents and the Washington State Farm Bureau.
"...McKenna called the continued efforts to push an income tax 'incredibly disrespectful … how many times do voters have to say no?'"
The 17-page complaint lays out the case against the tax and is worth reading in its entirety. The suit contends that calling the capital gains tax an "excise tax" is a masquerade; it's an unconstitutional non-uniform tax on personal income in excess of the one percent limit allowed by the Constitution. Further, the suit says that the legislative supporters' internal communications acknowledge that the tax is a tax on annual income and that they intended for the legislation
"to set up a “test lawsuit” to urge the Washington Supreme Court to overrule this longstanding precedent prohibiting a state income tax absent a constitutional amendment. The Legislature is seeking to put the question to the Supreme Court because the voters have rejected ten initiatives or referendums to impose an income tax on the people of Washington. And the Legislature seeks to overcome that resistance by judicial fiat rather than risk yet another voter rejection of their efforts to amend the Constitution. Indeed, the Legislature is so convinced that voters would reject this tax if given the opportunity that they inserted an “emergency declaration” in ESSB 5096 in a transparent effort to prevent the people from having their say, effectively disenfranchising the entire voting public."
McKenna tells The Seattle Times that he expects the two suits to be combined and considered together by the courts.
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New collections report shows strong revenue growth |
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"Major General Fund-State (GF-S) revenue collections for the April 11, 2021 – May 10, 2021 collection period came in $266.1 million (13.7%) higher than forecasted in March. Cumulatively, collections are now $345.3 million (9.9%) higher than forecasted. Tracked collections grew 47.9% year over year due to last year’s pandemic- related shutdowns and deferred tax payments. Year-over-year growth rates are expected to remain high over the next several collection reports. "
As the graph above shows, revenues are now coming in above the pre-pandemic trend, boosted by extraordinary federal assistance to businesses and individuals.
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Governor signs and praises operating budget |
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"Lawmakers used $10.6 billion in federal virus relief funding In the budget that ends in mid-2023. The amount is separate from the $59 billion in state spending."
Still, the WRC reports reasons for concern. And, yes, the capital gains tax again comes into play. The issue is the newly-enacted child care bill, which the Research Council points out enhances early learning and child care. The enhancements are ongoing; the funding source is, at this point, not so enduring.
"The budget bill states, “The legislature finds that the state lacked the fiscal capacity to make [child care] investments and the additional federal funding has provided the opportunity to supplement state funding to expand and accelerate child care access, affordability, and provider support as the state navigates the COVID-19 pandemic and its aftermath.”
"The federal relief is one-time money, which makes it a questionable funding source for an ongoing program. On top of that, the cost of implementing E2SSB 5237 will continue to rise over the next several years."
So, where does the capital gains tax come in? The controversial tax, with its unpredictable revenue stream, it seen as a future funding source.
"The Legislature intends to use the newly enacted capital gains tax to pay for these child care and early learning programs after the federal relief is gone. Sen. Christine Rolfes told Washington State Wire in March, 'The improvements in the first year of the plan are funded partially with federal funds that we’re getting specifically for child care purposes . . . . When the capital gains tax kicks in, that picks up the slack for the one-time funds and the federal funds.'”
Maybe. And maybe when the federal windfall is gone, the state budget will experience the sustainability challenge that was worrying us before the pandemic.
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Governor signs climate change bills, vetoes key transportation linkage |
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"Washington Gov. Jay Inslee Monday signed into law a carbon-cap program and a clean-fuels standard, but vetoed parts of those bills requiring a new statewide transportation-funding package in order for the ambitious climate legislation to take effect.
"Inslee’s move — capping a big win on climate legislation while once again testing the bounds of his executive powers — essentially scrapped the “grand bargain” that was struck in the Senate to make sure those two bills passed the Legislature last month."
The Seattle Times editorial board writes,
"With long-sought climate change bills finally on Gov. Jay Inslee’s desk, he whipped out his veto pen Monday and deleted provisions essential to legislative approval. The action trashed a sensible bargain lawmakers struck to pass the climate bills while upping pressure for long-range upgrades for bridges, transit, ferries and roads — infrastructure Inslee claims to support.
"Inslee’s decision to shred that shrewd legislative construct diminishes lawmakers’ political motivation to pass a transportation package. It also eviscerates the faith his fellow Democrats had that the governor supported the deal-making that built a coalition to pass his environmental bills.
"It also bolsters the charges that this governor has made a habit of overreach."
The editorial concludes,
"... the best hope for the state’s much needed transportation package is for the courts to invalidate one or both of Inslee’s vetoes. That would keep intact the incentive for lawmakers to advance the transportation package in special session. Lawmakers need to get this deal done, with — or without — leadership from a governor who claims to be “fully committed” but acts otherwise."
We expect we'll be hearing more about this in the coming weeks.
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