Tax fight still not over

Legislature: Gregoire tries to end standoff; B&O increase raises hackles

March 21, 2010 

The sales tax remains the sticking point keeping lawmakers in Olympia.

The conflict extending their special session into a second week involves either passing a sales-tax increase that the House can’t stand, or killing a smattering of tax breaks, each of which has just enough Senate defenders to keep it alive.

“Everything else is lining up,” House Majority Leader Lynn Kessler said. Democrats have settled on an overall ratio of taxes to spending and savings as the solution to a $2.8 billion budget shortfall. They are moving toward deals regarding prison downsizing and other budget cuts.

The House and Gov. Chris Gregoire no longer insist on a tax on candy and gum. The House has pulled back from taxing plastic surgery and has agreed with the Senate that service businesses should be a primary target of their tax increases.

Gregoire is intervening in the budget standoff. The House passed her new $788 million tax package late Friday and early Saturday, in effect rejecting the Senate’s sales-tax option and sending the budget into further bargaining. Lawmakers will return Monday to see if negotiators have made progress.

The governor planned to meet with Senate and House leaders Saturday to try to broker an agreement.

It’s not that either chamber is dead-set on its own tax package.

Sen. Ed Murray, the Senate’s top Democrat on taxes, said he can’t round up the votes for the House’s offer.

“I have no ideological lines in the sand over any of these items,” he said. “But again, you’ve got to find the votes.”

Senators balk at items including a tax on banks’ mortgage-interest earnings, a sales tax on custom software and repealing a sales-tax exemption for out-of-state residents that helps businesses in Washington border counties, Murray said.

And Kessler said the centerpiece of House Democrats’ new offer, a temporary $201 million increase in the business and occupations tax, just reflects that they “needed something” to make up for the absence of the temporary 0.2 percent sales-tax increase that the Senate wants but many House Democrats oppose.

The B&O tax increase is the centerpiece of the pitch by Gregoire and the House. Nearly every service business – a category that includes lawyers, accountants and hairdressers – would pay a one-quarter percentage point more in B&O tax, with an exemption for hospitals and a tax credit for companies with receipts of less than $72,000 a year.

Businesses representatives say they would be hit when they can least afford it.

“Using a B&O tax approach disproportionately puts that burden solely on business, when we’re already paying 52 percent of the tax burden in our state,” said Amber Carter, a lobbyist for the Association of Washington Businesses.

In contrast to the majority party, Republicans were unified against every strand of Gregoire’s attempt at a compromise. Rep. Doug Ericksen of Ferndale called it a path to socialism and a “tax-increasing, job-killing celebration of big government.”

But the House approved the tax package on a 53-42 vote, with six Democrats in opposition: Reps. John Driscoll of Spokane and Tim Probst of Vancouver, plus four South Sound lawmakers, Reps. Christopher Hurst of Enumclaw, Mark Miloscia of Federal Way, Dawn Morrell of Puyallup and Larry Seaquist of Gig Harbor.

Rep. Mary Lou Dickerson of Seattle said the budget supported by the tax increases would not only protect teachers and other state employees, but also private-sector health care workers who care for the sick, elderly and mentally ill.

“These are important jobs, these are thousands of jobs, and these are jobs that will be saved,” Dickerson said.

The House omitted one piece of Gregoire’s compromise that dealt with collecting $11.6 million in taxes potentially owed by “shell,” or tax-dodging, corporations – although it could return. There are concerns on both sides of the aisle about powers it would give the Department of Revenue to define tax cheats and go after them.

The two packages have several items in common, including raising the cigarette tax by $1 per pack, adding sales tax to bottled water sales, limiting out-of-state companies’ access to a tax exemption and extending the B&O tax to the manufacture of certain agricultural products and to payments to corporate directors.

Other pieces have strong opponents waiting in the Senate.

Democratic Sen. Craig Pridemore of Vancouver long has said that the Legislature needs to raise revenues to blunt cuts. But he is unlikely to vote for any package that repeals the sales-tax exemption for shoppers from out of state, which helps businesses in border counties draw purchasers from Idaho and Oregon.

“That would be pretty much impossible for me,” Pridemore said. “I think the sales tax is pretty modest – 20 cents on a $100 purchase.”

Other Democrats, such as Sen. Jean Berkey of Everett, have misgivings about taxing interest earnings for banks on first mortgages.

But it’s possible that Rep. Ross Hunter, the House Democratic taxation wizard, will be able to overcome objections to the bank tax. Hunter said there are two pieces of the tax package that affect the banks – and after accounting for the piece that helps in-state banks, the institutions come out even or ahead financially under the tax changes.

Hunter also said Washington is the only state that doesn’t tax those interest earnings in some way.

Brad Shannon: 360-753-1688

Jordan Schrader: 360-786-1826

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