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February 23, 2010 at 2:01 PM

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Senate Democrats propose three-tenths increase in sales tax

Posted by Andrew Garber

By Andrew Garber and Jim Brunner
Seattle Times staff reporters

OLYMPIA -- Senate Democrats on Tuesday proposed raising more than $900 million in new revenue by boosting the cigarette tax, closing tax exemptions and increasing the general sales tax by three tenths of a cent until 2013.

Gov. Chris Gregoire last week proposed a smaller tax package that would raise $605 million, without a general sales tax increase.

The Senate proposal would raise $518 million by closing tax exemptions, such as imposing taxes on some out-of-state companies on the portion of business they do here. The so-called "economic nexus" tax would mainly hit banks and credit-card firms, raising $73 million.

A three-tenths of a cent increase in the state sales tax would raise $313 million and a $1 per pack increase in the cigarette tax would bring in $86 million.

The Senate budget also calls for $838 million in cuts, including eliminating $79 million in funding for the class-size reduction initiative, I-728 and cutting an additional $69.5 million out of funding for colleges and universities.

Gregoire and Democrats in the Senate and House have said that unless the state brings in more money through taxes, the Legislature will have to whack programs such as subsidized health insurance for thousands of low-income workers, aid to people who can't work because of disabilities, and financial aid for lower-income college students.

"We said no to cutting being the solution to current economic problems," said Sen. Margarita Prentice, D-Renton, chairwoman of the Senate Ways and Means Committee. "We said no to cutting services that will pave the way for a robust economy."

To soften the impact of a sales-tax increase, Senate Democrats are proposing a tax rebate for low-income families.

Basically, families that qualify for the federal Earned Income Tax Credit also would eligible for a tax rebate from the state. The rebates would start at 5 percent of the federal credit and ramp up to 10 percent over time. The rebates would cost the state an estimated $5 million in fiscal year 2011.

Republicans contend tax increases would hurt the economy, and maintain the state should close the budget gap through cuts and by finding cheaper ways to provide services.

Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee, said the taxes proposed by the Democrats would only harm the economic recovery.

Even many the tax loopholes Democrats have identified for closure would harm specific industries like auto sales and home loans, Zarelli said.

"Anything we do around revenue or tax policy ought to be something we do because it's the right thing to do, not because we need the money," he said.

A bill suspending Initiative 960, the tax-limiting measure that requires a two-thirds vote of the Legislature for tax increases was approved by the Senate on Monday night and is expected to be signed by the governor on Wednesday.

With I-960 suspended, lawmakers can increase taxes with a simple majority vote.

House Democrats came out with a budget Tuesday that calls for a tax package that raises $857 million, along with more than $600 million in cuts. House budget writers did not discuss which taxes they want to increase, saying details are expected to be released tomorrow.

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Jim Brunner
Covers politics.

Keith Ervin
Covers the Eastside.

Andrew Garber
Covers politics and state government from Olympia.

Emily Heffter
Covers local government.

Mike Lindblom
Covers transportation.

Kyung Song
Covers politics and regional issues from Washington, D.C.

Lynn Thompson
Covers Seattle City Hall.

Bob Young
Covers King County and urban affairs.