2023 Legislative Session Preview
January 11, 2023
by Mike Nelson
With the 2022 elections behind us, we adjust our focus to the 2023 Legislative Session. Democrats in Washington have expanded their legislative majorities in both the State House of Representatives and Senate. The party now holds a 58-40 lead over Republicans in the House and a 29-20 lead in the Senate.
In December the Senate and House will finalize changes to committee structure, various committee rosters, and how the public will be able to interact with the process. Since the last two years have been virtual sessions this will be the first year that many of the legislators have been in person with each other and the public in any capacity.
As we prepare for the launch of the session, WSCPA members will be meeting with legislators in Olympia during Hill Day on January 19 to discuss key matters expected to come before the legislature.
There are several issues that we are expecting to be addressed by the legislature when the session begins in January. This year is a "long" session which lasts for 105 days. The legislature will be enacting a new biennial budget for July 1, 2023 until June 30, 2025. Despite continued slowdowns in economic growth and worries about a potential recession, the state is still expecting tax revenues to grow over the previous biennium and even over previous projections.
Margin Tax & More
As part of the expected budget, a significant issue that the WSCPA Advocacy team has been tracking is recommendations of the Tax Structure Work Group (TSWG) and additional new tax proposals or changes. The TSWG has been discussing how to make the tax system more progressive and fair. We expect to see several of the recently-discussed proposals related to the budget discussed thoroughly during the session.
As reported in the fall 2022 issue of The Washington CPA, one of those proposals is a margin tax styled after the Texas tax system. The TSWG voted 6-1 at their December meeting to include a margin tax recommendation to the legislature. This proposal still has a lot of unknowns around it and more clarifications will be needed.
Wealth tax proposals have also been discussed by Senator Noel Frame and legislators have expressed broad support for increasing property tax and rental credits, as well as expanding other programs like the Working Families Tax Credit. Additional increases or new tax proposals are expected to accompany these proposals, as any new tax credit or reduction would need tax revenues to offset them. There have been some discussions around modifying certain provisions of the estate tax system to limit qualified charitable deductions. This would bring more money into the state as many large estates have been leaving significant funds to charities in recent years.
Long Term Care Act
Beyond the many aspects of the budget documents and potential tax changes, the Long Term Care Act is expected to be discussed again this session. The start of this program was delayed from January 2022 to July 2023 and more tweaks are expected. According to the committee overseeing the implantation of the program, more exemptions were granted to the payroll tax portion of the program than were expected. Because of this there are various requests for the legislature to revise the exemption provisions of the program. One of the changes would be a timed exemption so that an individual who had been granted an exemption would be required to show on an annual basis that they have maintained their private coverage. If this, or other, modifications are made to the program, some of the individuals who had been granted exemptions to the program would likely lose their exemption, increasing the tax base funding the program.
Capital Gains Tax
Another large unknown is when and what the State Supreme Court will decide about the capital gains tax that was passed in 2021. The Douglas County Superior Court ruled the tax was unconstitutional during the summer, but the State Supreme Court is scheduled to hear oral arguments in the case in late January. On November 30, the Supreme Court stayed the lower court ruling. This means that the Department of Revenue (DOR) can continue to prepare for and collect the tax on April 18 if the court has not issued a decision in the case by then. Regardless of the final court decision, the legislature will likely need to act. If the court determines the tax is unconstitutional, the legislature will need to account for the nearly $1 billion decrease in their current and projected future biennial budgets. All, or most, of the funds collected by the tax were earmarked to go into the Education Legacy Trust Account. This account helps fund K-12 schools, higher education financial aid, early learning and child-care programs. On the other hand, if the Supreme Court rules to allow the tax to proceed, depending on the specifics of their ruling, more guidance will need to be provided by the DOR and additional clarifications of the law will need to happen. The DOR sought legislation in 2021 to clarify certain aspects of the law but that was not pursued by the legislature while they awaited the Supreme Court’s decision. This would likely need to be revisited if the tax is allowed to move forward. There have also been some discussions that if the State Supreme Court does allow the tax to move forward, then there will be a legal challenge in federal court. If that does happen, the legal uncertainty around the tax will likely continue for a few more years.
Given the many uncertainties and nuances, if you or your firm expect to have clients who would be subject to the tax, the WSCPA will continue to schedule CPE programs covering the tax as updates unfold.
Throughout the legislative session we will continue tracking these major pieces and any new issues that develop. You can watch for updates via the All Things Advocacy blog and email.
Mike Nelson is the WSCPA Manager of Government Affairs. You can contact Mike at mnelson@wscpa.org.
This article appears in the winter 2023 issue of the Washington CPA magazine and was an update to an earlier blog. Read more here.