Washington lawmakers approve change to business tax to fund college affordability

OLYMPIA — In light of concerns that the state would not be able to pay for the Legislature’s landmark 2019 promise to make college more affordable, lawmakers late Thursday passed a bill that would change the tax that’s supposed to fund the measure.

Initially, the 2019 package planned to use a business-and-occupation tax to pay for a measure that would make tuition at public colleges significantly more affordable or free for students statewide, starting in the 2020-21 school year.

The new bill, sponsored by Sen. Jamie Pedersen, D-Seattle, replaces the tax lawmakers approved last year with a different version of that tax. In addition to worries that there wouldn’t be enough funding, lawmakers were concerned that last year’s version was so complicated, there could be trouble collecting it. Instead of a three-tiered tax on services, for example, it sets a 1.75% rate for most businesses that gross more than $1 million annually.

“But most importantly, the bill will protect our historic investments in higher education that the Legislature made in 2019,” Pedersen wrote Thursday night in an email. “Every student in our state will have access to an affordable higher education.”

Democratic House lawmakers Thursday night approved Senate Bill 6492, 52 to 45. No Republicans voted in favor of the bill; five Democrats from swing districts around the Puget Sound voted against it. The new version of the tax would raise about $234 million over the 2021-23 budget cycle to fund the Washington College Grant.

The measure, which has passed the Senate, now heads to Gov. Jay Inslee. As long as a review of the bill by the governor’s office doesn’t raise any concerns, Inslee intends to sign it into law, according to spokesman Mike Faulk. If Inslee signs it, the law would take effect April 1.

The legislation comes in response to higher-than-expected costs for the Washington College Grant, which lawmakers created through last year’s Workforce Education Investment Act.  The move drew national fanfare for its promise to pay full tuition and fees for about 110,000 students from families who make less than $50,000 a year — and partial tuition for families who make up to the state’s median income, which is about $92,000 for a family of four. Next school year is the first time students would be eligible for the benefit.

The Washington College Grant replaced the State Need Grant, which ran out of money every year. The premise of last year’s college-affordability legislation, which came as Inslee campaigned for president, was to guarantee financial aid for anyone who qualified. The new program ends Washington’s financial-aid waitlists.

Republicans, who opposed last year’s version of the tax, also opposed this new one. Rep. Brandon Vick, R-Vancouver, said lawmakers should instead use the higher-than-projected revenue from existing taxes to fund college affordability.

“Our projected revenue increases alone since we left last year are enough to fund all of these college slots,” Vick said during the House debate.

SB 6492 retroactively repeals last year’s three-tiered set of surcharges for business-and-occupation taxes on services that took effect Jan. 1, meaning those surcharges wouldn’t have to be collected. Under the previous legislation, more than 80,000 Washington businesses that rely on highly educated workers saw their annual tax rate jump from 1.5 to 1.8%. The new bill lowers this rate to 1.75% and changes the mix of businesses subject to the surcharge. Now, all businesses that gross more than $1 million annually are required to pay this higher rate, regardless of the type of workers they employ.

The bottom line: fewer businesses will pay a surcharge, but they’ll generate more tax revenue since they gross more money than businesses previously subject to the tax.

The bill also sets a 1.5% business-and-occupation tax rate — which was the rate before last year’s tax plan — for hospitals and some other categories, and services with less than $1 million in gross receipts annually, according to a legislative analysis. The bill levies a 1.22% “advanced computing surcharge” on some of these businesses, such as Microsoft and Amazon, which brings their total tax rate to 2.72%. That surcharge would tax those companies up to $9 million per year.

Democrats argued Thursday night that it’s necessary not just for students, but to train the workers needed for qualified jobs in Washington.

House Majority Leader Pat Sullivan, D-Covington, said his daughter graduated from Seattle University in December and applied for a Kent School District job on Wednesday.

“She starts tomorrow,” Sullivan said after Thursday’s night’s vote. “They are so desperate for people.” This college program, he added, “fills that void.”