Olympia's tax plans: How they'd affect you

OLYMPIA — Senate Democrats on Tuesday proposed something that hasn't happened in 27 years — a general sales-tax increase.

The Senate plan would raise $918 million in new revenue overall, with roughly a third of that coming from a three-tenths-of-a-cent increase in the state sales tax (to 6.8 cents) until June 30, 2013. The rest of the money would come from boosting the cigarette tax and closing tax exemptions.

Republican opposition aside, increasing the state sales tax has been a tough sale, with the last bump coming in 1983.

Local jurisdictions have continued to raise their portion of the sales tax, with the rate in most of King County now at 9.5 percent. But the prospect of voting for a new statewide increase to help close a $2.7 billion budget gap gives many lawmakers the willies.

"The polls say if you raise the sales tax, 'throw the bastards out.' So there are people who are nervous about that," said House Majority Leader Lynn Kessler, D-Hoquiam, who has supported a temporary sales-tax increase.

Gov. Chris Gregoire this session said she has concerns about increasing the sales tax but hasn't ruled it out. Last week, when she proposed a smaller tax package that would raise $605 million, she did not include a sales-tax hike.

House Democrats released their budget Tuesday after the Senate did. It calls for an $857 million tax package, but they did not say which taxes they'll propose. Details are expected Wednesday.

The Senate budget proposal would raise $518 million by closing tax exemptions, such as imposing taxes on some out-of-state companies on the portion of business they do here. Those taxes would mainly hit banks and credit-card firms.

A three-tenths-of-a-cent increase would raise $313 million, and a $1-per-pack jump in the cigarette tax would bring in $86 million.

To soften the impact of a sales-tax increase, Senate Democrats are proposing a tax rebate for low-income families.

Basically, families that qualify for the federal Earned Income Tax Credit also would be eligible for a tax rebate from the state. The rebates would start at 5 percent of the federal credit and ramp up to 10 percent over time.

Spending cuts, too

In addition to tax increases, both the Senate and House proposals call for several hundred million dollars in cuts.

The Senate plan outlines $838 million in cuts, compared with $653 million in the House. Both proposals, for example, would eliminate about $79 million in funding for the class-size-reduction initiative, I-728.

No information was available Tuesday directly comparing the two budgets, but both also propose cutting millions from higher education, health care, human services, natural resources and general government.

Both budgets also would save money by having state agencies furlough some workers for several days, or find equivalent savings.

Lawmakers have to close the $2.7 billion gap in the current two-year budget, running through June 2011.

The shortfall represents the amount of money it would take to maintain current state services compared with the amount of tax revenue the state is expected to collect.

The Governor's Office projects it would cost about $32.4 billion to maintain existing services through June 2011 and leave $512 million in reserve. However, the state expects to have only around $29.7 billion in tax revenue and other resources on hand to pay the bills.

Democratic leaders say that unless the state increases taxes, the Legislature also would have to whack programs such as subsidized health insurance for thousands of low-income workers and aid to people who can't work because of disabilities.

GOP: Find more cuts

Republicans contend tax increases will hurt the economy, and say the state should cut more and find cheaper ways to provide services.

Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee, said the taxes proposed by the Democrats would only hinder the economic recovery.

Some of the tax exemptions Democrats have proposed ending would harm specific industries, such as auto sales and home loans, Zarelli said.

"Anything we do around revenue or tax policy ought to be something we do because it's the right thing to do, not because we need the money," he said.

The Senate on Monday eased the way for new taxes by passing a bill that suspends Initiative 960, a tax-limiting measure that requires a two-thirds vote of the Legislature for tax increases. Gregoire is expected to sign the bill on Wednesday.

With I-960 suspended, lawmakers can increase taxes with a simple majority vote.

It's far from clear what kind of tax package the Legislature may end up passing.

In the Senate, Sen. Ed Murray, D-Seattle, said the sales tax seems to have less opposition than the proposal to close tax exemptions.

"I've not had one person walk through here today and say don't do the sales tax," said Murray, chairman of the Senate Democratic caucus. "But it's been a flood of people saying don't do this individual thing or that individual thing."

In the House, Kessler said Tuesday there weren't enough votes yet to approve any of the tax packages being considered. "People are really mixed," she said.

Andrew Garber: 360-236-8268 or agarber@seattletimes.com.

Staff reporter Jim Brunner contributed to this report.