Washington Governor: “Buck Up” and Accept Capital Gains Tax

January 16, 2015

“Buck up,” Gov. Jay Inslee (D) said in introducing a budget calling for $1.4 billion in higher taxes over the coming biennium, including a new capital gains tax that is merely the latest in a string of efforts to introduce some sort of income tax in the state.

Inslee isn’t the first elected official to tell Washingtonians to get with the (higher tax) program. The state has twice adopted personal income taxes twice, and corporate income taxes four times—and each time, the measures were struck down for violating provisions of the state or federal constitution. Washington State’s constitution, in particular, has a tax uniformity clause that has twice been declared to preclude any sort of individual income tax or other tax on tangible personal property.

But that hasn’t stopped politicians from trying. In 2010, Washington residents resoundingly defeated an income tax on high earners, 64 – 36 percent. The constitution hadn’t changed, but proponents of the measure—including then-Governor Christine Gregoire, who campaigned in part on opposition to income taxes—hoped that this time, the courts would deliver a different outcome. The voters overwhelmingly denied them the opportunity to test that theory.

In 2013, it became easier to raise taxes. Washington State’s constitution provides that any initiative adopted by the voters cannot be set aside by the legislature for at least two years. And so, for years, Washingtonians have been engaged in a tug-of-war with the legislature, adopting multiple initiatives imposing super-majority requirements for raising taxes, only to see the initiatives set aside by legislatures a few years later. Then, last year, legislators went to court, securing a ruling striking down any and all vote requirements above the constitutionally-mandated ceiling.

It didn’t take long for government officials to put their newfound power to use. But now, Gov. Inslee has taken a page from Gregoire, introducing a budget calling for substantial tax increases despite a campaign pledge to veto new taxes.

Yes, but desperate times call for desperate measures, right? Not so much: the Governor’s budget increases spending by $5 billion, a 15 percent increase over the current biennium. Nearly $3 billion of that increase comes from projections of greater revenue from existing taxes as the economy grows. So, to be clear, the Governor who pledged to veto any tax increases is proposing tax hikes in a biennium where his own budget office expects dramatic growth in tax revenues. A lot of tax hikes, really: there’s a capital gains tax, a carbon tax, the elimination of nearly $250 million in sales and use tax exemptions, and more.

But it’s the new 7 percent capital gains tax that deserves the most attention, because it marks the latest attempt to tax income, each attempt focused on an ever narrower percentage of the population. If enacted, it would make Washington the third state without a general income tax to tax investment income, joining Tennessee and New Hampshire. In Tennessee, this tax—called the Hall Tax—is a perennial subject of repeal legislation, and many hope that its days are numbered. Unfortunately, some Washington State officials want to go in the opposite direction.

When a few state legislators sponsored a capital gains tax bill in 2013, it went nowhere. One imagines that these lines from the fiscal note didn’t help it along: “Capital gains are extremely volatile from year to year. Forecasted amounts in this fiscal note could be greatly over or understated.”

That point, however, bears repeating. Capital gains taxes are highly volatile. Market returns swing greatly year-to-year. Thus, capital gains taxes decrease undercut revenue stability and magnify economic trends: when the economy shrinks, the bottom drops out. Washington State doesn’t need new taxes, and it certainly doesn’t need a capital gains tax. By foregoing an income tax, Washington has fostered a favorable economic climate that would be undercut by allowing the camel’s nose under the tent.

So buck up indeed, Washingtonians: you’re in for yet another clash on income taxation.

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