Bake Sale, Anyone?

When Jay Inslee was running for governor last fall, he found himself backed into a corner. You dont get elected by promising to raise taxes, so he made a remarkable promise: I would veto anything that heads the wrong direction, and the wrong direction is new taxes in the state of Washington, he said.

Now that Inslee has won, Republicans are taking bets on how long it will take for the new governor to change his tune. Governor Inslee seems to be the only one who thinks the Legislature will be able to avoid a tax increase this yearor at least a rollicking debate about one. Around the statehouse, the main difference between the political camps is that Democratic leaders say a tax increase is inevitable and Republicans say a tax increase proposal is inevitable. Senate Republican Leader Mark Schoesler claims hes running a pool at his farm in Ritzville and the slots are filling fast. He says, I think having a calendar of dates for promise breaking is going to be lots of fun.

Just goes to show some people are so cynical. Governor Inslee doesnt have to break his promise. Lawmakers can raise taxes without himthough, of course, you might be considered doubly cynical for wondering if that could have been the plan from the beginning. Exactly how things are going to play out this year is anyones guess. As always, it comes down to the final few plays of the session. But the way things are shaping up, its hard to see how lawmakers are going to avoid at least talking about taxes. At the starting gate, the more useful question might be which ones?

But first things first. Before the debate begins, lawmakers have to decide how big the budget shortfall really is. Which points up the big difference between this years problem and those of recent years. This time around, lawmakers at least get to choose how big a problem to make for themselves. Lawmakers have been forced to cut billions in real and projected spending since 2009, due to the recession and unsustainable spending plans from the boom years. But after four years of belt-tightening, they have just about brought things into line.

Now, the economy is lurching back into motion again. When lawmakers write their next budget, for 2013-15, they will have about $2 billion more to spend than last time, the first good news in ages. Currently, the Office of Financial Management estimates the state will run about $900 million short of the cost of maintaining current programs, but thats a pittance compared with the past few years. And if you look behind that figure, you can see the gap could be bridged with a minimum of trouble. The figure assumes lawmakers would make no choices at all, and a few easy onessuch as tapping the states half-billion-dollar rainy-day fundmight leave them with a couple of hundred million to spare.

So whats the problem? You could blame it on the state Supreme Court and what is known as the McCleary decision, a ruling that the state isnt spending enough on K-12 schools. The court said last year it might be satisfied if lawmakers just found the money to pay for a couple of education reform bills they passed in 2009 and 2010. That would cost about $1 billion over the next two years. But theres plenty of talk right now about going further, adding salary increases for non-teaching staff and big enhancements to other education programs. An early proposal from Jeff Vincent, chairman of a Joint Task Force on Education Funding, would cost $2.5 billion. Until theres agreement on the spending, no one knows how deep the hole will be. Heres how precise the estimating gets: House Ways and Means staffer Dave Johnson informed his committee in November that the problem looks like sort of a minimal two-billionish shortfall. In Olympia, they work in round numbers.

In Capitol hallways, people still snigger about some of the things Inslee said during the campaign. He was going to avoid a tax increase by focusing like a laser beam on job creation. His 75-point plan involves promotion of high-tech and green-energy businessesinnovation is the states secret sauce, he explainedbut for it to fill state coffers with a billion dollars or more in tax revenue within two years, hell need a mighty special recipe. He never did mention any numbers.

Other elements of his program were just as squishy. He promised to close tax loopholestacitly declaring those tax increases to be something other than tax increasesbut the only ones he could name were a previously eliminated tax exemption for banks and a tax break on the sale of bull semen worth $500,000. He promised to promote government efficiency through lean management, without noting that former Governor Christine Gregoire had already put it into practice, and that its potential payback is likely in the tens of millions after considerable time and investment. Not even fellow Democrat Gregoire was impressed: I dont know how you meet your obligation for McCleary without new revenue, she says.

Is it possible to avoid a tax increase? I was skeptical of all campaign white papers, says House Ways and Means Chairman Ross Hunter, DBellevue, who doubts a budget could be written that meets all the states legal obligations without new revenue, much less pay for niceties like colleges and universities. Hes working on a no-new-taxes budget, but adds, I do think it is unlikely that people will want to vote for that.

Now heres the dirty little secret. Lawmakers can always send a tax increase referendum directly to the voters, bypassing the governor. Under the terms of I-1185, the latest iteration of initiative promoter Tim Eymans two-thirds-for-taxes rule, it takes a two-thirds vote of the House and Senate to impose a tax increase, and Republicans arent about to help the majority Democrats with that. The only other option is a public vote. Add to that the fact that Democrats have essentially lost control of the Senate with the defection of two Democrats from the Democratic party caucus to the Republican, and the party is far from united.

A strategy begins to emerge: A tax proposal might go to the ballot earmarked for education; it has to be something interest groups can rally behind and voters will support. Says Senate Democratic leader Ed Murray of Seattle, I get the reality. The votes arent there. The governor says he wont sign it, so if there is a proposal, the business and labor and education advocates and interest groups are going to have to come to a grand compromise around reform and revenue. Otherwise, everything we would send to the ballot would fail and it wouldnt be worth their time.

So whats it going to be? In mid-December, Gregoire made her own proposal before leaving officea dramatic parting gift to the state that proposes higher taxes on gasoline, soda, candy and gum. The only other proposal that has been seen is one from Vincent of the education task force. It includes two options that might not raise too many hacklessuch as extending a couple of the temporary taxes from 2010 that are set to expire, a tax on beer, and a business and occupation surcharge on service businesses. Others might stir a wee bit of trouble, like a proposal to extend the sales tax to consumer services, worth $217 million. The trial lawyers, a key Democratic constituency, might have a thing or two to say about that.

Really, there arent many choices that would raise big money in a short period of time. We know in this state that there are only two significant levers to pull that get you more than $1 billion, and nobody has really wanted to pull either of them, observes Richard Davis of the Washington Research Council. A sales tax hike or significant surtaxes on the B&O [business and occupation] tax. Those are the ones that respond immediately. You could talk about a capital gains tax, but I dont think thats going to raise the kind of money that people think it will. I would love to meet the person who has enjoyed a capital gain in the last month. My portfolio sure hasnt.

One possibility seems to come from left field. State Sen. Kevin Ranker, DOrcas Island, is shopping around a proposal for a tax on industrial carbon emissions that might serve the dual purpose of discouraging the use of fossil fuels for energy production.

Its a concept that has been put into practice in places like British Columbia. Here, the prospect makes some business owners gulp, and its hard to imagine the idea becoming a cause that unites all of Olympia, much less the state. But given Inslees constant talk of green technology, it could prove appealing enough to lead him to break that promise of his.