HOUSE BILL REPORT

HJR 4205

BYRepresentatives Wang, Holland, Nelson, Sayan and Brekke; by request of Governor Gardner

Modifying the Constitution to allow for tax reform.

House Committe on Revenue

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (11)

      Signed by Representatives Wang, Chair; Pruitt, Vice Chair; Appelwick, Basich, Fraser, Grant, Haugen, Morris, Phillips, Rust and H. Sommers.

Minority Report:  Do not pass.  (6)

      Signed by Representatives Holland, Ranking Republican Member; Horn, Assistant Ranking Republican Member; Brumsickle, Fuhrman, Silver and Van Luven.

House Staff:Robin Appleford, Rick Wickman and Bob Longman (786-7136)

AS REPORTED BY COMMITTEE ON REVENUE APRIL 3, 1989

BACKGROUND:

The state Constitution does not include any provisions relating to revenue limits or rainy day funds.

Rainy day funds and revenue limitations are two mechanisms commonly used by states to control taxes and expenditures.  A rainy day fund is a contingency fund set aside during times of strong economic growth to be spent during periods of weak economic growth.  The Legislature created the budget stabilization account in 1981 to serve as a rainy day fund.  This account has never had money in it because the statutory language does not clearly indicate how money is to be transferred to the account.  The Legislature subsequently created the revenue accrual account in 1983, and directed that any balance remaining in the state general fund at the end of each biennium be transferred into this account.  Monies in this account may be used only to reduce unfunded liabilities in the state pension systems.  This account has received all ending fund balances since 1983. 

Revenue limitations are usually designed to limit growth in revenues to growth in the economy or population.  Washington has a revenue limitation, Initiative 62, that was approved by the voters in 1979.  Initiative 62 limits the growth in state tax revenues to a three year average of growth in state personal income.  Any revenue collected in excess of the limit is to be set aside for the next fiscal year.  Washington has never exceeded this revenue limit.

The state Constitution has been interpreted by the state Supreme Court as prohibiting income taxes.

Property taxes cannot exceed 1 percent of the market value of the property under the state Constitution, except for levies approved by the voters and certain levies by port districts and public utility districts.  The Constitution does not limit the rates of excise taxes.

The state Constitution requires all property taxes to be assessed and levied uniformly.  A constitutional amendment adopted in 1965 allows the Legislature to provide property tax relief for low- income senior citizens and disabled persons.

SUMMARY:

The Legislature must establish a revenue limit that cannot exceed the growth in personal income.  All "general state revenues" as defined for the constitutional limit on state debt are subject to the limit, plus certain dedicated revenues that are not part of "general state revenues."  Dedicated revenues that must be included in the limit are: (1) The state property tax levy for schools, and (2) all taxes levied for a specific purpose, unless dedication for the specific purpose is in a law: (a) enacted before January 1, 1990, (b) approved by a 60 percent vote of the Legislature, or (c) approved by the people as an initiative or referendum.

The revenue limit may be exceeded by a law approved by 60 percent of the Legislature, or by an initiative or referendum approved by the people.  Otherwise, the Legislature is required to set tax rates so that the limit is not exceeded.  If actual revenues exceed the limit, the excess must be deposited in the revenue reserve fund.  Revenues from property and income taxes are included in the revenue limit.

The Legislature must establish a revenue reserve fund.  Revenues in excess of the limit must be deposited in the fund, as well as biennial ending fund balances from the state general fund. Appropriations from the reserve fund require approval of 60 percent of the Legislature.  If the balance in the fund exceeds 3 percent of the general fund appropriations for the previous biennium, the excess may be transferred to other funds or accounts as provided by the Legislature.

The Legislature may enact income taxes, and coordinate state income taxes with federal income taxes.  The standard deductions and personal exemptions cannot be decreased from the amounts established in the initial enabling legislation.  Revenues from income taxes are dedicated to common schools and higher education.

The relative proportionality between the rates of state sales and use, business and occupation, public utility, personal income, and corporate income taxes must not be altered, unless by a law approved by 60 percent percent of the Legislature, or by an initiative or referendum approved by the people.

Any bill that includes an exemption from tax, an exclusion or deduction from the base of a tax, a credit against a tax, a deferral of tax, or a preferential rate of tax shall not become law unless enacted by 60 percent percent of the Legislature, or by an initiative or referendum approved by the people.

The Legislature may grant property tax relief to homeowners and/or renters with respect to real or personal property occupied by them as a residence, through partial or total exemptions, direct payments, credits, or refunds, or through any combination thereof, under limits and conditions deemed appropriate by the Legislature.

SUBSTITUTE RESOLUTION COMPARED TO ORIGINAL:  Changes in special or excess property tax levies approved by a simple majority of voters were eliminated.  A proposed proportionality of revenues to be maintained with three percentage points from income, sales and use, business & occupation, and utility taxes is altered to proportionality of tax rates for income, corporate, business & occupation, sales and use, and utility unless modified by 60 percent of the Legislature or by initiative or referendum.

A corporate income tax is authorized by constitutional amendment. The revenue limit is expanded to include dedicated revenue, unless the dedicated revenue is approved by 60 percent of the Legislature or initiative or referendum. All future tax exemptions, credits, deductions, or changes to the base must be approved by 60 percent of the Legislature.

A proposed rainy day fund is changed to a reserve fund.  The limit on the reserve fund balance is lowered from five percent to three percent.  A declaration of emergency by the governor is not necessary before money is appropriated from the reserve fund.

Revenue:    The bill has a revenue impact.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Janis Aimee, People for Fair Taxes; Mark Allen, WA Library Association; Harold Anderson, Washington Retired Teachers Association; Basil Badley, AIA, HIAA & ACLI; Walter Ball, Association of Washington School Principals; Terry Bergeson, Washington Education Association; Dennis Bolton, North Thurston Education Association; Eleanor A. Brand, Senior Citizens' Lobby;  Edward Carlson; Frank Chopp, Fremont Public Association; Howard Coble, WASA; C. E. Cole; Bill Daley, Superintendent of Public Instruction; Bill Denney, Covington Appliance; Lon Dickerson, Washington Library Association; Ned Dolejsi, WSCC; Bob Drewel, EVCC; Jerry Fay, Transportation Improvement Board; Stan Finkelstein, AWC; Jean Fioten, EVCC;  Michael Foss, Washington Association of Temporary Services; Jan Gee, Washington Retail Association; Ernie Geissler, CRAB; Bob Gilden, Blaine School District; Mark Haley, Brown & Haley; Lynn Harsh, Washington '92;  Ruth Hertzberg; Charlie Hodde; Jeff Johnson, Washington State Labor Council, AFL-CIO; Ron Knowles, K-Mart; John Knox, BJ's Paints; Tony Lee, Washington Association of Churches; Steve Lindstrom, Washington State Transit Association; Scott B. Lukins, Washington State University; Ian MacGowan, West Coast Grocery; Linda Matson, NFIB; Jim McIntire; Vicki McNeal; Jim Metcalf, Washington Association of Counties; Gary Moore, Washington Federation of State Employees; Joe Mottram, JC Penney; Darwin Nealey, Representative; Mike Ormsby, Eastern Washington University; Ray Otani, Boeing; John Pinette, Washington State Catholic Conference; George W. Schneider, Washington State Medical Association; Art Siegal, SCCD; Dwayne Slate, School Directors;  Karen Taylor-Sherman, WSSDA; Pat Thibaudeau, Washington Women United; Marilyn Tolan, League of Women Voters; David D. Webber; Bill Wilkerson, Department of Revenue; and Roy Wiseman, Seattle Holdings Corporation.

House Committee - Testified Against:      Gladys Burns; Meta Heller; Gary Smith, IBA; Paul W. Locke; Norbert Mueller; W. M. Fosbre, WETA;  and Thomas H. Ferree, Ferree & Assoc, Inc.

House Committee - Testimony For:    It is not clear in the proposed constitutional amendment that revenues cannot grow faster than personal income or that revenue from state property and income taxes are included in the revenue limitation.  There are no assurances that deductions and exemptions will never be raised in the proposed constitutional amendment.

House Committee - Testimony Against:      A proposed constitutional amendment should not limit the Legislature's ability to raise revenues.