This post has been updated to reflect the fact that the Washington State Budget and Policy Center’s capital gains tax report was intended to show several examples of how a capital gains tax could benefit the state, and is not “prescriptive,” in policy analyst Andy Nicholas’ words, and is supposed to be a long-term budget solution, not a short-term revenue fix.
The Washington Budget and Policy Center has a proposed solution that would (what else?) tax the rich to help address the state’s ongoing structural budget shortfall: A new tax on capital gains, profits made when shares of a financial asset are sold for more than their original purchase price (e.g. stocks, bonds, and vacation homes), combined with a lower state sales tax (the report suggests 6.1 percent instead of the current 6.5 percent) and a “working families tax rebate” equivalent to ten percent of the earned income tax credit.
If the state had “had a modest five percent capital gains tax (with a $10,000 exemption) been in place, in five out of the last six biennia (9 of the last 12 fiscal years) state revenues would have met or exceeded spending on health care, education, and other core public structures,” the WBPC report concludes. “The result would have been a more balanced and sustainable system of financing these and other important public priorities.” A five percent tax would generate a little over half a billion dollars a year; a ten percent tax, a little over a billion.
In Washington State, capital gains profits grew from $7.4 billion in 2001 to $23.7 billion in 2007—a 21 percent annual increase. More than 81 percent of capital gains in 2007 went to the wealthiest 3 percent of state residents.
The tax, as proposed (the report isn’t prescriptive about the exact size of the tax or the exemptions) would exempt all capital gains below $5,000 for individuals, and $10,000 for couples, meaning that only three percent of Washington State taxpayers would pay any additional tax. Other common investment activities, like saving for retirement and selling a primary home, would also be exempt from the tax.
Only a handful of states, including Texas, Nevada, South Dakota, and Florida, do not tax capital gains.
In the example in the WBPC’s report, half the capital gains would go into the state rainy day fund. A measure on this November’s ballot, SJR 8206, would require three-quarters of all “extraordinary revenue growth”—revenues that are one-third higher than the average growth over the past ten years—go into the rainy day fund. The WBPC doesn’t like the proposal, by Sen. Joseph Zarelli (R-18), because it locks money in an account that can only be tapped by a supermajority (three-fifths) vote of the legislature.
Read the group’s whole capital gains tax proposal here.
