Politics & Government

Third budget plan cuts exemptions

State House Democrats want to raise about $760 million in taxes by shrinking a long list of tax exemptions and collecting more money from smokers, lawyers, accountants and out-of-state businesses.

The plan, announced Monday, is the latest of three proposals from state leaders as they seek to bridge a $2.8 billion budget deficit.

Debate over the tax plans now heads into high-pressure negotiations with Democratic Gov. Chris Gregoire and the Senate’s majority Democrats, with just 10 full days left in the 2010 legislative session.

The House proposal is nearer to the laundry-list approach favored by Gregoire. It does not include a general sales tax increase, which was a central part of the Senate’s tax blueprint.

“Our focus was on removing exemptions and closing loopholes,” said House Finance Committee Chairman Ross Hunter, D-Medina. “This approach makes sure everyone is doing their fair share in helping our state get back on its feet.”

The package also was tailored with an eye toward surviving a challenge in the fall elections. If they’re unable to scuttle it during the legislative session, tax hike opponents could file a ballot initiative to give voters the final say.

Gregoire gave the House approach a positive review Monday, repeating her criticism that a general sales tax increase could hurt Washington.

“While I know we have to raise revenue, I want to do it in a way that doesn’t jeopardize our recovery,” she told a news conference.

The House plan does, however, significantly broaden the sales tax base by eliminating about $205 million in exemptions on custom software, candy and gum, bottled water, janitorial services and plastic surgery – with an exception for medically needed reconstructive procedures.

Residents of other states also would lose the ability to waive Washington sales tax on purchases made here. The tax currently is 6.5 percent, although local governments add their own levies, pushing the rate above 9 percent in the most expensive areas.

The House plan also raises about $247 million by overhauling parts of the tax code. Another $73 million comes from altering how out-of-state businesses are taxed – aimed mostly at credit card issuers, banks and other financial firms.

A laundry list of other exemptions and preferences would be closed or downsized, accounting for roughly $174 million, including breaks on the interest that banks collect for first mortgages, and investments by nonfinancial firms, with exemptions intended to help smaller companies.

Only two pieces of the House plan appear to be straight-ahead hikes: An extra $1 per-pack tax on cigarettes, and a temporary 0.5 percent increase in the business taxes paid by certain service professionals, including lawyers, consultants and accountants.

Since House leaders earlier said they wanted enough revenue to pay for nearly $860 million in programs, their revenue plan also counts on an additional $100 million to be transferred into the general fund from the state construction budget and lottery proceeds.

The Legislature’s overall budget plans also rely on hundreds of millions of dollars in spending cuts, federal aid and one-time accounting fixes. Those figures will be worked out in negotiations – the House’s budget proposal called for about $650 million in cuts, the Senate’s roughly $830 million.

Republicans have staunchly opposed the Democratic drive for higher taxes.