Late this morning the Washington Legislature released the 2010 supplemental operating (SB 6444) and capital budgets (HB 2836).

The release of the budgets was followed by a press conference with leadership from both chambers. Legislators discussed a balanced approach to remedying the $2.8 billion state budget gap, including reductions to state programs and services, one-time transfers of dollars, federal funding, and new revenue.

Legislators acknowledged that Washington has a structural problem with regard to taxes, citing the state’s regressive tax system and the narrowing limits placed on new revenue through various initiatives passed over the years. Legislators plan to continue discussions on reforms and solutions through the interim in preparation for the 2011 legislative session.

An overview of the budgets released today echoes the implementation of this multi-pronged approach to remedying the $2.8 billion state budget shortfall this biennium.

The Legislature reduced funding for state programs and services by $755 million. Among the multitude of reductions, some of the major reductions included:

• The elimination of the remaining $79 million in Initiative 728 per student allocations to school districts;
• Reductions in funding of $73 million to institutions of higher education near the minimum level required for the receipt of federal stimulus funds;
• Savings of $67 million from the implementation of an additional assessment on hospitals and leveraging federal match;
• Reductions of $49 million to all areas of state government through the requirement of temporary layoffs or salary savings;
• Reductions of $46 million from correctional facility capacity;
• Reductions of $30 million to reduce the grade 4 class size enhancement;
• Savings of $30 million from information technology;
• Reform of the Security Lifeline programs (formerly GA-U), $ 28 million
• Savings of $15 million through the elimination of the learning improvement day for teachers.

The Legislature incorporated approximately $618 million of approved/anticipated additional federal relief to Washington State. The supplemental operating budget anticipates $480 million in additional resources based on the Federal Medical Assistance Percentage (FMAP) enhancement being extended by an additional six months through June  2011.  Congress is considering legislation that would extend the enhancements beyond the current end date, December 2010.

In addition, based on a recent U.S. Department of Health and Human Services reversal of the decision to disallow state savings from Medicare Part D “clawback” payments for prescription drugs, the state expects to receive $87 million in additional federal resources beyond the current level assumed in the state budget.

Finally, the Legislative budget offsets $39. 5 million in the Security Lifeline and Basic Health programs based on receiving a waiver allowing a portion of these state costs to be supported with federal funds; and the budget assumes additional federal resources of approximately $12 million from two smaller sources of federal aid.

The supplemental operating budget, in addition to reductions and federal funds, makes $461 million in additional transfers from various funds to increase General Fund-State resources.

Some of the larger transfers include:

• $141 million from the Public Works Account
• $101 million from the Education Savings Account
• $21 million from the Job Development Account
• $18 million from the Education Construction Account
• $16 million from the Life Science Discovery Fund
• $16  million from State and Local Toxics Account
• $15 million from the Performance Audit Fund
• $15 million from the Public Service Revolving Account
• $12 million from the Treasury  Service Account
• $10 million from the Savings Incentive Account
• $10 million from the Streamlined Sales Tax Account

Finally, the Legislature plans to pass legislation that would raise $794 million with a net increase of $757 million after $12 million in legislation that decreased revenue is acknowledged. This includes:

• $7.4 million in tax loopholes
• $241.9 million B&O tax on service businesses
• $59 million beer tax increase
• $33.5 million soda/pop tax increase
• $32.6 million bottled water tax increase
• $101.4 million cigarette and other tobacco product tax increase
• $10 million convention center
• $15 million lottery marketing

The House is expected to take up the operating budget first today, followed by the Senate.

This evening the House passed Senate Bill 6143, which modifies excise tax laws to preserve funding for public schools, colleges, and universities, as well as other public systems essential for the safety, health, and security of all Washingtonians.

The House passed the conference report agreement signed earlier today by the Senate and House with a vote of 52-44.

Senate Bill 6143 raises $667.7 million in new revenue. Combined with the revenue expected to be generated by an increase in the cigarette tax and taxes on other tobacco products, the total revenue generated is expected to be $794.1 million.

Senate Bill 6143 now goes to the Senate where they are expected to take action on the bill tomorrow when they convene at 2:00 p.m.

The House is adjourned until 9:00 a.m. on Monday, April 12.

The revenue conference report signed by the House and Senate this afternoon will provide less revenue than was previously proposed earlier this week.

The revenue conference report provides $794.1 million in new revenue ($667.7 million +$126.4 million cigarette tax). This is over $7 million less than the $801.3 million proposed in the revenue agreement discussed this past week.

So what is different?

• Minimum Nexus Standards ($84.7 million). Incorporates all changes from Senate and House. In addition, includes a B&O deduction for interest and fees on loans secured by commercial aircraft. Effective June 1, 2010.
• Tax Avoidance Transactions ($8.5 million). Provides the Washington Department of Revenue authority to disregard three specific types of tax avoidance transactions. Creates legislative oversight committee. Effective May 1, 2010.
• Homestreet Fix (modifying first mortgage deduction) ($3.6 million). Servicing of loans by the originator of the loans qualifies for the deduction; other types of fees and charges are not deductible. Effective June 1, 2010.
• Livestock nutrients (sales tax exemption for livestock nutrient equipment and facilities) ($1.3 million). Changes effective date to July 1, 2010 from April 1, 2010.
• Corporate Directors B&O (B&O tax on corporate directors) ($2.1 million). Changes effective date to July 1, 2010 from April 1, 2010.
• Sales and use tax applied to bottled water ($35.3 million). From June 1, 2010 to June 30, 2010 bottled water is subject to sales and use tax. The exemptions for prescribed water and for persons without potable water are made in the form of a refund except for bulk deliveries.
• Sales tax applied to candy and gum ($30.5 million). Candy and gum are subject to sales tax, as of June 1, 2010. Provides a job credit of $1,000 per position for the next two years for candy manufacturers. Washington Department of Revenue will publish a list of taxable candy, if not on the list, retailers must check with Revenue.
• PUD privilege tax clarification ($1.2 million). Changes effective date to May 1, 2010 from June 1 in the Senate and April 1 in the House.
• Temporary B&O tax surcharge on service businesses ($241.9 million). Temporary B&O surcharge of 0.3% from May 1, 2010 to June 30, 2013. Permanently doubles the small business tax credit for service businesses. Excludes public and private hospitals as well as certain R&D activities.
• Property management B&O (limits the B&O exemption for property management salaries) ($6.9 million). The exemption is not repealed but rather is limited to nonprofit property management companies and property management companies that contract with a housing authority. Effective June 1, 2010.
• Temporary Beer Tax increase ($59. million). From June 1, 2010 to June 30, 2013 increases the Beer Tax by 50 cents per gallon (28 cent increase for six packs). The temporary increase does not apply to the first 60,000 barrels produced by small breweries
• Temporary soda/pop tax increase ($33.5 million). Beginning July 1, 2010 to June 30, 2013 increases the tax on carbonated beverages (pop/soda) by 2 cents per 12 oz bottle. The first $10 million in sales is exempt from the tax increase.

Here is what did not change.

• DOT Foods (direct seller B&O exemption) ($155 million).  Effective  May 1, 2010. 
• Agrilink (B&O tax on manufacturing of certain agricultural products) ($4.1 million).  Effective May 1, 2010.
• Tax debts corp (tax debts – corporate officer liability)($1.1 million)
• Bad debt (limits the bad debt deductions) ($1.7 million)

And finally, here is what was not included in the conference report.

• Changing the definition of “qualifying business”, regarding data centers, so that a lessee of a least 20,000 sq. ft. of space within an eligible computer data center can qualify for the exemption. Amends the job provisions to provide associated definitions regarding the requirement to increase employment by 35 family wage jobs.
• Limiting the foreclosure exemption from the Real Estate Excise Tax (REET).
• Repealing the B&O tax job credit for international service activities.
• Changing the rural county tax incentive to allow for claims for incentives for computer programming only when it is used to create a new item for sale.
• Limiting the B&O deduction for dues and initiation fees.
• Repealing the sales tax exemption for coal used at a coal-fired thermal electric generation facility.
• Changing the exemption for machinery used to create electricity and wind to require a producer to either be a local utility or someone contracting with a local utility for the sale of power.
• Establishing the temporary 0.2% slaes and use tax and Working Families Tax Credit.
• Repealing the nonresident sales tax exemption
• Establishing an aircraft excise tax.
• Capping the first mortgage interest deduction at $120 million.
• Extending sales tax to custom software
• Eliminating the credit against the sales tax for the Convention Center.

Early this afternoon members of the conference committee for Senate Bill 6143 (the revenue bill) met and signed the revenue conference report – $794.1 million in revenue.

Senators Murray and Prentice and Representatives Hunter and Hasegawa received a summary of the conference report from staff prior to signing the report.  Democrats took the opportunity offered by the conference report signing to underline the importance of new revenue to protect public services.

Both chambers also shared that vote counting on the revenue package is continuing.  When asked by the media if there are votes in the House and Senate to approve this compromise, Senator Murray, Democratic Caucus Chair, said “We’re confident but we’re counting votes.”  Similar thoughts were echoed by House Finance Chair, Representative Ross Hunter, “I think we’re very close. I think we’re closer than we were yesterday.”

At the same time the House and Senate continue to count revenue votes, negotiations on the operating and capital budgets continue. As shared by Senator Margarita Prentice, Chair of the Senate Ways & Means Committee,  “We’re still working,” when asked about negotiations on the actual budget.

The revenue conference report would provide the state with $794.1 million in new revenue.

Conference Revenue Report
($794.1 million)

• Temporary Services B&O surcharge to 1.8% without hospitals and narrow exemption for R&D. Small business credit doubled (credit permanent). Effective May 1, 2010 and expires June 30, 2013 ($241.9 million).
• Temporary Beer Tax increase of 50 cents per gallon. Twenty-eight cent increase per six pack. Microbreweries exempt. Effective June 1, 2010 and expires June 30, 2013 ($59 million).
• Temporary soda/pop tax increase of 2 cents per 12 oz bottle. Bottlers under $10 million in volume exempt. Effective July 1, 2010 and expires June 30, 2013 ($33.5 million).
• Dot Foods ($155 million).
• Cigarettes and other tobacco products (House Bill 2493) ($101.4 million).
• Nexus ($84.7 million).
• Sales and use tax applied to bottled water. Exemption for prescription water and unavailable potable water ($32.6 million).
• Sales tax applied to candy and gum. B&O credit for jobs ($30.5 million).
• Lottery Marketing (Senate Bill 6409) ($15 million).
• Convention Center (Senate Bill 6889– Delivered to the Governor) ($10 million).
• Tax avoidance ($8.5 million).
• Property management. B&O ($6.9 million).
• Agrilink ($4.1 million).
• Homestreet fix ($3.6 million).
• Corp. Dir. B& O ($2.1 million).
• Bad debt ($1.7 million).
• Livestock nutrients ($1.3 million).
• PUD clarification ($1.1 million).
• Tax debts corp ($1.2 million).

The conference report must sit on the bar of both the House and Senate for a full day before it can be voted upon. The report can only be voted up or down without amendment. The House will take up the package first, likely tomorrow.

No official announcement has been released at this time regarding a final agreement on revenue by the Legislature. The new revenue package released earlier this week is still being considered by both Chambers and votes are being counted.

Though no progress has been made to seal the deal with regard to revenue since the last blog posting, there is some hope that tomorrow’s scheduled floor action at 2:00 p.m. for both Chambers will be the necessary first step to a successful sine die of special session.

Next week, Tuesday, April 13, will mark the end of the first special session of 2010, final revenue package and budgets or not.