House revenue proposal scheduled for hearing

In the House Democrats’ 2017-19 state operating budget proposal released on March 27, the $44.6 billion proposal relies on approximately $1.5 billion in new revenue to help address the McCleary funding decision and fund other program needs. The revenue proposal also introduces a number of changes to the rates of existing taxes with an intent of making Washington’s tax system less regressive.

HB 2186 is set for hearing in the House Finance Committee on Monday, April 3 at 8 am. AWC is organizing a panel of city officials to testify on a number of the provisions affecting cities.

Revenue proposals

The bill contains the following revenue items:

1. Marketplace Fairness

• Establishes new requirements for collection of sales tax by out-of-state retailers.
• This has been a long-standing AWC federal priority and several states have enacted or are considering similar state legislation.
• Legal challenges on this issue are moving through the courts in cases from South Dakota and Alabama and eventually expected to be taken up by the Supreme Court to reconsider whether the 1992 decision prohibiting sales taxes on out-of-state retailers would still be a burden on interstate commerce, particularly due to the dramatic increase in internet sales.

2. State B&O tax changes

• Increases the rate of tax by 20% for businesses with more than $500,000 revenues.
• Provides new exemptions for small businesses with less than $250,000 revenues and a new deduction for businesses with revenues of $250,000 to $500,000.
• Eliminates the preferential B&O tax rate for prescription drug resellers and international investment firms.

3. Sales & use tax changes

• Eliminates of the sales tax exemption on bottled water.
• Replaces the nonresident sales tax exemption with a refund process for the state portion of the sales tax.

4. State REET change to graduated rate based on property sales value

• Reduces the rate for property sales less than $250,000 from 1.28% to 0.75%.
• Keeps the current rate for sales from $250,000 to $1 million at 1.28%.
• Increases the rate for sales $1 to 5 million to 2% and more than $5 million to 2.5%.
• Does not impact the rates or base of the local REET.

5. Capital gains tax

• Imposes a 7% capital gains tax. Exempts the first $25,000 (individuals)/$50,000 (joint filers), as well as the sale of most primary residences, retirement accounts, and certain agricultural sales.

Other provisions

• Requires local governments that issue building permits to submit subcontractor information to the Department of Revenue to help the department verify that taxes have been paid.

More details and revenue estimates will be available as the House considers the proposal.

After the House Finance Committee hearing, we do not expect further action on this bill from the full House until agreements are reached between the House and Senate negotiators.