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Capital gains tax: a way to fund schools?

Capital gains tax proposed by a Washington State Democrat as a way to fund education. But a capital gains tax would require bipartisan effort as legislature works to address a nearly $1 billion budget shortfall.   

By Rachel La CorteAssociated Press / February 8, 2012

Washington Gov. Chris Gregoire gives her annual State of the State address to a joint session of the Washington state Legislature last month at the Capitol in Olympia, Wash. One key Democratic legislator is proposing to create a capital gains tax to avoid cuts in education that loom because of a budget shortfall.

Ted S. Warren/AP/File

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OLYMPIA, Wash.

The Senate's chief budget writer on Monday proposed a plan that would have voters decide not only on a temporary sales tax increase this year, but also on a permanent capital gains tax that would be dedicated to paying for education for the long term.

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Sen. Ed Murray, D-Seattle, told The Associated Press that he doesn't want the bulk of education cuts or cuts to critical care hospitals to be decided by voters, as proposed by Gov. Chris Gregoire in November.

Instead, Murray said that he wants to see Republicans and Democrats work together to maintain those programs, by increasing some business and occupation preferential rates, increasing the cigarette tax, extending the beer tax and reducing the sales tax break for cars purchased from auto dealers, among other things. The sales tax proposal that would go to voters would help backfill other cuts lawmakers might make, and the capital gains tax would address education.

But the revenue votes that Murray wants to take up in the Legislature to prevent putting education cuts on the ballot require a two-thirds vote, which means majority Democrats would need Republican votes, something Murray says he is hopeful for.

Murray said putting education and critical health care on the ballot is a "win or lose scenario."

"We shouldn't take that risk," he said. "We should take care of that problem here."

Murray said he hadn't yet talked to Republicans about his proposal, but he believes they will want to work to reduce cuts that directly affect their districts, like to rural hospitals, instead of leaving it to voters. Murray said that while he's talked to the Democratic caucus, there wasn't yet consensus.

Republican Sen. Joe Zarelli, the Senate GOP's lead on budget issues, expressed skepticism toward Murray's plan.

"I would say it's highly unlikely they would muster two-thirds to do all of the above," he said. "It's solving a problem by raising a bunch of taxes."

Zarelli said that while a legitimate discussion could be had on reviewing tax preferences, or eliminating a first mortgage tax deduction for large national banks as Murray suggests, Republicans want to focus on reforming government before talking about taxes.

But Murray stressed that those actions alone won't solve the state's nearly $1 billion budget crisis, so in addition to sending voters a temporary sales tax increase, as proposed by Gregoire, Murray also wants voters to decide on a capital gains tax. Murray says his proposal would ramp down the amount of that sales tax that would go down as a permanent capital gains tax of 5 percent would start in Jan. 1., 2013.

Capital gains taxes are applied when someone makes a profit off of the sale off of something, like stocks or real estate.

"Cutting alone won't solve the problem long term," Murray said of the need for sending a tax proposal to the voters.

Under Murray's referendum proposal, a half-cent sales tax increase would take effect on July 1, bringing in nearly $500 million to help the current budget. In 2014, the sales tax would decrease to three-tenths of one cent. In 2015, it would decrease again to two-tenths of one cent, and in 2016, it would go away completely. The capital gains tax would be permanent, and dedicated to paying for basic education in the state.

Lawmakers returned to the Capitol on Jan. 9 for the 60-day legislative session, tasked with addressing the projected budget deficit through June 2013.

Gregoire wants a buffer of several hundred million dollars in case the economy underperforms, meaning legislators will have to make about $1.5 billion in cuts or find new revenue. The Democratic governor has also asked the Legislature to send a temporary sales tax to the November ballot to help offset those pending cuts.

Senate Democrats have said they would have a budget proposal ready shortly after the next revenue forecast, which is scheduled for Feb. 16.

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