With the clock ticking, Governor Jay Inslee (D) called the Washington State Legislature into its third and final special session on June 28th to determine the budget for the next biennium. The budget includes many important changes in the state tax code. Although the Office of Financial Management projected revenue growth in the absence of any tax increase, new education funding mandates and the Governor’s legislative priorities drove debate over additional revenue options. Under the Washington Supreme Court’s McCleary decision , legislators were obligated to increase overall education funding levels in the coming years. Compounding this funding obligation was ballot initiative, I-1351 , which mandated smaller class sizes at a cost of $2 billion over the biennium not mandated by, and not fully addressed by, the state’s obligations under McCleary. Throughout the regular session and into the first special session, Governor Inslee and his legislative allies championed a capital gains tax (Washington State does not impose an individual income tax), which, in its final version, would have been levied on capital gains exceeding $25,000 per annum. Sensing dwindling opportunity to reach an agreement including capital gains taxation, however, House and Senate leadership agreed on the outline of a deal in which House Democrats dropped the capital gains tax proposal in exchange for Senate Republican support for eliminating a number of tax exemptions and preferential rates. The following table details some of the new revenue raisers included in the new budget. 2013-2015 2015-2017 2017-2019 Marijuana Regulation $6.9 $14.8 $41.3 Out-of-State Wholesaler Nexus $45.4 $98.3 Online Click-Through Nexus $28.3 $35.3 Increased Late Payment Penalties $23.0 $25.0 Repeal M&E Sales Tax Exemption $57.2 $70.7 Repeal B&O Exemption for Royalty Income $31.4 $37.5 Public Works Assistance Account Transfer $73.0 $73.0 Tobacco Settlement Account Transfer $51.4 Governor Inslee signed the operating budget , funding $1.3 billion for K-12 education, reducing tuition to the University of Washington and Washington State University by 15 percent and other regional universities by 20 percent. The table above outlines the greatest revenue raisers which includes account transfers, elimination of certain tax exemptions, and new tax policy. Among the notable changes— Marijuana Regulation: HB 2136 eliminates the 25 percent producer and processor taxes while increasing the retailer tax to 37 percent. You can read more about Washington’s marijuana reform here . Nexus for Out-of-State Wholesalers: This policy, as part of SB 6138 , extends the Business & Occupation (B&O) gross receipts tax to wholesalers with more than $267,000 in receipts in Washington State but have no physical presence within the state. Online Click-Through Nexus: This policy requires online wholesalers with receipts exceeding $267,000 to collect Washington’s sales tax, even if the company lacks physical presence in the state. Elimination of manufacturers’ sales tax exemption: Washington State has repealed the sales and use tax exemption for machinery and equipment—including “canned” software—used in manufacturing and R&D operations. B&O Tax preferential rate repeal: the current, lower 0.484 percent B&O tax rate on royalty income has been eliminated in favor of the general rate. Gas tax increase: Governor Inslee has yet to sign the transportation package ( ESSB 9877 ), which would raise the gas tax by 11.9 cents per gallon over two years. Transfers: Over the next biennium, $178.1 million of the budget will be funded through transfer payments, chiefly from the Public Works Assistance Account and Tobacco Settlement Account.
Michigan has been tangled up in a transportation funding back-and-forth for the last year or so. The most recent episode was a May ballot initiative to raise sales and gas taxes that failed 80-20 . As of yesterday, news sources report that legislators in the House and Senate have come back with new funding plans. The Detroit Free Press has a run down of the two plans: House roads plan Use $700 million in extra revenues that were reported in the May Revenue Estimating Conference and future growth in the state economy. Use $45 million in additional revenue from making the tax on diesel fuel equal to the tax on regular fuel and instituting user fees for people who drive hybrid or plug-in electric cars. Use $185 million through a $75-million raid of the 21st Century Jobs Fund and $60 million in revenues from the tribal gaming casinos, which now go into economic development, and shifting $50 million in film subsidies to roads, Eliminate the Earned Income Tax Credit given to working poor families. The credit amounts to roughly $143 a year for working poor families and will save the state $118 million in fiscal year 2015-16 and $121.5 million in fiscal year 2016-17. Senate roads plan Raise $822 million a year by fiscal 2017-18 by increasing the gasoline tax from 19 cents per gallon to 23 cents on Oct. 1, 2015, to 27 cents on Jan. 1, 2016, and to 34 cents on Jan. 1, 2017. And increase the diesel fuel tax to 21 cents per gallon on Oct. 1, 2015, 27 cents on Jan. 1, 2016, and 34 cents on Jan. 1, 2017. The revenues raised in the third year of the increase will go into a “lock box” that won’t be distributed until the Michigan Department of Transportation, in concert with local road agencies, comes up with a plan to build better roads that are designed to last for 50 years. “We don’t want to throw money at poorly constructed roads,” said Amber McCann, spokeswoman for Senate Majority Leader Arlan Meekhof, R-West Olive. “It’s basically a check on the system to make sure they are using this money wisely.” Beginning Jan. 1, 2018, adjust the tax rates on gasoline and diesel fuel, based on U..S. Consumer Price Index, rounding up to the nearest 1/10 of a cent. Reduce the individual income tax beginning on Jan. 1, 2018, if the percentage increase in general fund revenues from the prior fiscal year exceeds a positive inflation rate. And require that $350 million from income tax revenues be deposited in the Transportation fund in 2016-17 fiscal year; and $700 million in each subsequent year. There are no specifics on where cuts will be made to make up for the $700-million shift to roads. Common ground in House and Senate plans Require MDOT and local road commissions to get warranties for full replacement on projects of more than $1 million. Require competitive bidding for local and state road projects of more than $100,000. Apply the motor fuel tax to alternative fuels. While some of my Michigan friends are howling over a few of the revenue raisers, there are some good policy changes in these plans. In the House plan, for example, bringing the diesel excise tax up to parity with the gasoline tax is low-hanging fruit. Diesel vehicles, mostly large trucks, do the most damage to the roadbed, and should pay at least the same fares as regular cars, if not more. House leaders have also incorporated some transportation funding recommendations from the Michigan-based Mackinac Center: namely, scaling back generous business incentives (the 21st Century Jobs Fund, the film subsidy program, and Michigan Economic Development Corporation). In the Senate plan, the gas and diesel tax increase phase-ins and inflation indexing connect the users of roads with the costs of their maintenance, while maintaining a steady revenue stream. The gas tax hikes are offset with income tax cuts when general fund revenue exceeds the inflation rate. Though the plan moves some $350 million in income tax revenues to transportation spending, on net, it makes the Michigan transportation funding structure more based on user fees and taxes. Legislators and the Snyder administration are expected to come up with a compromise between the House and Senate plans to pass in the fall. More on transportation . Follow Scott on Twitter .