3 Days Left Until the Legislature Adjourns

The major tax increase bills are having a tough time getting the votes to pass. Senate Majority Leader Lisa Brown said today that the income tax bill is dead for this year. The News Tribune is reporting that there are not enough votes in the House to pass any tax referendum this year. Since they are referenda, they only need a simple majority to get through the legislature. But, there are not enough Democrats supporting them to send the taxes to the voters.

That leaves SB 6173, to change the way contractors collect and remit sales tax. The fiscal note was revised yesterday from $40 million the first two years to $100 million, $450 million over the next 6 years. The AIA|WA, contractors and retailers worked today with the House to significantly improves the bill. All direct impacts on architecture firms were removed. The process was improved for contractors and retailers. Much work will need to be done on the rulemaking. But, it is a dramatically better bill. The House passed it with bipartisan support.

On the budget, the House and Senate Democrats reached an agreement last night on the operating budget. The House Democrats announced today that the operating budget will be voted on Friday and the Capital Budget on Saturday. No word on the timing of the final vote on the transportation budget; likely it will be Saturday or Sunday. They have not released any public documents on any of the three major budgets – possibly late tonight. So, we don’t know what’s in and out of them. We are especially interested to know if the design projects are back in the capital budget. House Chair Hans Dunshee has been fighting for more design projects. The question is whether the Senate Chair Margarita Prentice or the lead on the capital side, Senator Karen Fraser, will agree to restore the design projects.

The House late last night passed the bill to fund the deep bore replacement tunnel for Alaskan Way in Seattle. Since the bill was amended it will go back to the Senate for final passage, which is expected to concur. There were some anti-Seattle amendments attached, namely requiring Seattle taxpayers to fund any cost overruns on the project (even the state-funded portions). But, that was the only way it could get out of the House. Interestingly, Chopp was the lead proponent of that little amendment. After it passed, he voted against the bill, anyway.

Rep. Mike Armstrong (R-Wenatchee) was hospitalized last night after suffering a mild heart attack. He had surgery today to put in a stint. The word is that he is doing well. Please keep him in your prayers.

$100 Million Construction Tax Increase Analyzed

SB 6173, sponsored by Sen. Margarita Prentice, would change the resale certificate to a sellers permit. This measure will increase up-front costs by nearly 10% to contractors, an industry that is under substantial pressure due to the economy.

The state will incur additional administrative costs at a time when it is cutting programs. Penalties will increase under this measure to 100% of the tax value and sends a contrary message to the efforts of the Senate earlier this session to reduce paperwork violations for small employers.

The business, design and contracting groups believe the changes in this bill are unnecessary and efforts to raise revenues should be placed on job creation and business expansion instead of increasing penalties and the establishment of new programs.

The fiscal note indicates that the bill will increase construction costs by over $100 million in the next two years. Over 6 years, the bill will increase constructions costs by over $450 million. That is just for the state portion of the sales tax. The local government fiscal note has not been completed. We can expect that the local portion will be a huge hit as well.

SB 6173 purports to improve sales tax compliance but really targets construction contractors by eliminating the resale certificates and not allowing the state to issue the new seller’s permit to construction contractors. This may not be an official “tax increase,” but it is an added cost to construction contractors because the sales tax must be paid upfront for purchases of goods which then will be resold to the project owner and taxed.

Contractors will be forced to “float” revenue to the state, and will undoubtedly lose money due to the lag time experience on the credit exchanges. Tremendous cost increases and administrative difficulties will also result when trying to track and account for various transactions during the process of a project. All contractors will be penalized in the attempt to get at a few who are breaking the rules. There are better alternatives.

The construction industry is one of the few industries that will continue to play a significant role in the state’s economic recovery. It purchases goods, sells goods, employs skilled and unskilled workers, and is one of the largest contributors to the state’s tax coffers in the way of business taxes and payroll taxes.

This upfront tax payment will also add upfront costs to public project owners and the State. Many small contractors are working on a very slim profit margin, and the added upfront cost required in SB 6173 will be a real hardship, and it could result in more contractors laying off more workers and/or closing their doors, putting everyone in the firm out of work. In most cases, the sales tax for purchases during construction will be significant.

In a fragile economy, this is not the time to cripple the construction industry more by adding a cost that is unfairly targeted to only the construction industry.

Massive Construction Tax Increase Moving in Legislature

In 7 days, SB 6173 was introduced, passed out of the Senate and now is out of the House Finance Committee on its way to the House floor. This is definitely a bill on the fast track. It is request legislation from Governor Chris Gregoire.

SB 6173 would be a massive tax increase on construction projects: more than $100 million over 4 years.

The committee hearing today was interesting. The only proponent for the bill was the WA Department of Revenue. Those testifying against the bill included the AIA|WA and groups representing engineers, contractors, retailers and union workers. In other words it the entire private sector is against the bill and only the agency responsible for collecting the money was for it.

While the bill passed out 7-3, on a party line vote, several Democrats spoke of significant concerns with the bill. Representatives Santos, Ericks and Springer all said that they are only voting to move the bill forward and are not committing to supporting the bill on the House floor. They called for a lot work to be done to improve the bill before it moves further.

The Republicans on the committee all voted against the bill, citing its massive impacts on the construction industry.

The bill now goes to the House Rules Committee, which determines which bills go to the floor.

Those paying close attention may note that this bill is moving after all of the normal legislative deadlines have passed. It has been deemed “necessary to implement the budget,” and thus, is exempt from the deadlines. Look for a more detailed review in another post.

Also, normally a tax increase requires a two-thirds vote of the legislature or a vote of the people. Because this is framed as a change in the way taxes are collected, it in not deemed to be a tax increase.

Legislature Passes Efficiency First Bill-SB 5854

The Senate passed SB 5854, Efficiency First, bill, sending it to the governor. The governor is expected to sign the bill into law. Here is a quick summary of the bill as passed.

1. Energy codes

Residential and non-residential construction permitted under the 2031 Code must achieve a 70 percent reduction in energy use, using the 2006 Code as the baseline. The Council must adopt state energy codes between 2013 and 2031 that incrementally move the state towards achieving the 2031 Code standards.

2. Strategic Plan

The Department of Community, Trade and Economic Development (DCTED) must develop and implement a strategic plan for enhancing energy efficiency and reducing greenhouse gas emissions from homes, buildings, districts, and neighborhoods. This plan must be used to direct future increases in the Code.

3. Commercial building benchmarking

Beginning January 1, 2010, qualifying utilities must maintain records of energy consumption data for all non-residential and qualifying public agency buildings for which they provide service. Upon receiving authorization from a non-residential building owner or operator, the qualifying utility must upload all of the energy consumption data associated with that building to the Portfolio Manager. Non-public, non-residential building performance data must be uploaded either in 2011 or 2012, depending on the size

4. Public buildings

Establishes performance standards, benchmarking, and other reporting requirements for public buildings. Any reporting public facility with a National Energy Performance Rating score below 50 must undertake a preliminary energy audit by July 1, 2011. If potential cost-effective energy savings are identified, an investment grade energy audit must be completed by July 1, 2013, with implementation of the cost-effective energy conservation measures by July 1, 2016.

5. Leased public buildings

A qualifying public agency may not enter into a new lease or a lease renewal on or after January 1, 2010 for a facility with a National Energy Performance Rating score below 75, unless: (1) a preliminary energy audit has been conducted within the last two years; and (2) the owner or lessor agrees to perform an investment grade audit and implement any cost effective energy conservation measures within the first two years of the lease agreement, if such measures are identified in the preliminary audit.

New Tax Bills Introduced

Although the legislative season is quickly coming to a close, new tax bills have been introduced.

The bill that is getting the most attention, HB 2377, would impose a 2 year increase in the sales tax rate of 0.3 cents per dollar. This money would be dedicated to education spending.

Another bill, HB 2354, would impose a property tax on “intangible property.”

While the official fiscal note is not available, the intent section of the bill claims that it would raise $4 billion a biennium. Please take a moment to review the bill and send your thoughts to me.

There are questions of whether certain parts of the bill would enforce firms to move from cash to accrual accounting, make Owner/Architect Agreements taxable as soon as they are executed, and tax stocks/bonds.

These tax bills would dedicate the increase to education and health care. The AIA is monitoring their progress and will keep you updated.

Could Your Professional Liability Insurance Be Voided by a Proposed Law?

The legislature has been debating residential construction liability measures for the last few years. The latest bill to tackle this issue is E2SHB 1393. The bill as amended in the Senate would effectively void architects’ professional liability insurance.

The AIA|WA asked Victor O Schinnerer & Company to analyze the bill. Schinnerer is one of the nation’s premier providers of professional liability insurance for architects and engineers. They found that several of the bill’s provisions would leave architects without insurance coverage.

Regarding warranties and guarantees Schinnerer states,

“Professional liability policies do not cover express warranties or guarantees. Any allegation of breach of warranty would neither be defended by a professional liability insurance policy nor could any party suffering a loss based on the allegation of breach of warranty ever recover damages under a professional liability insurance policy.”

This is a lose-lose situation where the claimant and the defendant are exposed with no protection and no way to recover their expenses.

Regarding the fraud exclusion from the statute of repose they state,

“In addition, the CNA Policy – and to my knowledge all similar professional liability insurance policies – exclude from coverage any allegation of fraud. Therefore, legislation that creates a cause of action against design firms based on fraud and allows that cause of action to exist beyond any statute of repose places that firm at risk in perpetuity for an uninsurable exposure.”

Again, regardless of which party wins a suit, both parties lose. The claimant cannot recover damages and the defendant bears the crippling cost of defense.

The letter goes on to state that this legislation would lead to the loss of insurance for architects and engineers:

“It is highly likely that if this legislation were enacted, many design firms providing residential design services in the State of Washington will find that insurers will be unable to provide coverage to defend them at an acceptable cost.”

E2SHB 1393 is pending on the Senate floor calendar and could be voted on as soon as Monday.