Legislative News: Impact of Court Ruling on 2/3 Vote Requirement on Taxes

by Stan Bowman, Hon. AIA|WA
(originally sent 3/1/2013)

Yesterday, the Washington State Supreme issued its decision on a challenge to the voter approved requirement that tax increases be passed by a two-thirds (2/3) vote of the legislature and signed by the governor or by a simple majority of the legislature and a referendum passed by a majority of voters.

What did the court rule?

The court split its ruling regarding the two parts of the law. First, it ruled that the two-thirds requirement to be unconstitutional. Second, it declined to rule on the referendum requirement, saying it was not properly before the court (as no specific action had been taken on this option).

There are dozens of articles online about the ruling which will explain the details (search any newspaper in the state for more).

For our purposes, the pertinent question is what does the ruling mean for architects in the current legislative session?

The obvious impact is on the Business & Occupations (B&O) tax surcharge that was placed on service businesses, like architecture firms, in 2010 and which is set to expire on July 1, 2013. Prior to the court’s ruling it was widely held that extending the surcharge would require a 2/3 vote of both houses as it would be determined to be a tax increase under the initiative.

Now, a simple majority is all that is required to extend the tax surcharge. The court’s ruling makes it more likely that the temporary surcharge would be extended temporarily (again) or even permanently.

How will the majority House Democrats act?

House Democratic leadership (which holds the majority) is praising the court’s ruling but staying quiet on how they plan to proceed. The House Democrats have more than enough votes to extend the B&O tax surcharge, pass additional tax increases and/or pass new taxes.

It is likely that the House will vote to extend the B&O Tax surcharge for some number of years (the popular guess is between 2 and 4 years). The House may also pass some other tax proposals, such as a tax on capital gains or the elimination of tax exemptions.

How will the Senate Majority Coalition Caucus act?

The Senate Majority Coalition Caucus is decrying the ruling and is less tight-lipped about its plans. Senate Majority Leader Rodney Tom stated that the MCC will seek to amend the Senate Rules to require a 2/3 vote to pass tax increases. However, that would likely be challenged by the Senate Democrat leaders. It is unclear how Lt. Governor Brad Owen would rule on such a challenge.

On the one hand, Senate Rules may not be enforced which conflict with the state constitution. On the other hand, because of separation of powers, the courts may have little or no authority to overturn an operational rule of the Senate.

Members of the MCC have stated that they will push for a constitutional amendment to enact the 2/3 vote or referendum requirements. It is doubtful that they could get the 2/3 vote necessary in both the House and Senate to send such a constitutional amendment to a vote of the people. Should they garner the votes to refer it to the ballot, it would likely pass, as voters have passed the requirement 5 times as initiatives, dating back to 1994.

Regardless of the change in Senate rules or a constitutional amendment, the MCC has stated that it is unified against new taxes. They have stated a willingness to discuss tax exemptions, but do not support extending the B&O Tax surcharge or enacting sweeping new taxes, such as a capital gains tax.

While the MCC is adamant in its position right now, at some point the House and Senate will need to negotiate on a budget. The House is likely to insist on some tax increases in order to balance the state’s budget. The Senate will oppose such increases and seek to balance the budget within existing state revenues.

It is a situation of the unstoppable force meeting the immovable object. Which will win? That is yet to be determined.

The next question is what about Governor Jay Inslee?

During the campaign he pledged to not support tax increases. Since his election, he has stated that extending the expiring surcharge is not a tax increase. He stopped short of encouraging such an extension, but clearly indicated that he would not view it as a violation of his pledge. He also indicated that he does not view the elimination of exemptions as a tax increase.

It is further unclear what he would do regarding other tax increases. Governor Gregoire campaigned for office twice on no new taxes pledge. She promptly signed into law several tax increases in the first year of both her first and second terms. So, would Inslee follow Gregoire’s lead and abrogate his pledge if a tax bill lands on his desk or would he hold firm to his word and veto it, forcing lawmakers to go back to work on a budget without increased taxes? There is no clear prediction on this.

How can the AIA|WA affect the decisions to be made in the legislature?

We made a good start with the effective lobbying done at Capitol Connections by our members. I am continuing to meet with key lawmakers on the tax-writing and budget committees to educate them about the economic situation of architects and the impacts of past tax increases on the profession.

Next, we will need members contacting their lawmakers directly to discourage them from supporting an extension of the B&O tax surcharge. This is where the real impact must occur. Our members and their firms are best equipped to tell the economic story about the deleterious impacts of the tax surcharge on their firms and their employees.

If you have questions, please do not hesitate to ask.