By Erica C. Barnett

The Seattle City Council won’t take action on a proposed local capital gains tax or a related proposal to repeal the city’s water utility tax until after an effort to repeal the state capital gains tax, which pays for public schools, has run its course. The news of the delay, which will put both tax proposals in the hands of a mostly new council next year, came during a meeting of the council’s budget committee on Thursday.

Opponents of the state tax, which has brought in far more than expected in its first year, have filed an initiative to repeal it, part of a suite of anti-tax proposals backed by Redmond hedge fund CEO and Republican donor Brian Heywood. The campaign will have to gather more than 300,000 valid signatures to get the measure on the ballot.

Councilmember Alex Pedersen proposed repealing the water tax, currently 15.4 percent, and offsetting the lost revenues—around $40 million a year—with a 2 percent tax on capital gains, effectively replacing a regressive tax with a progressive one. The two proposals came as a package, with the capital gains tax proposal explicitly calling the tax “a more progressive method of taxation to replace revenues from regressive taxes no longer collected by The City of Seattle including, but not limited to, the tax on water.”

An analysis by city council staff estimated that the capital gains tax could raise around $38 million a year, based on Seattle’s share of state capital gains tax revenues from the state capital gains tax. However, the staff report cautions, that estimate doesn’t take into account “tax avoidance” by wealthy people who can move their assets around, and is based on “an extremely concentrated tax base,” which could make it an unreliable revenue source from year to year. Just 163 people are responsible for 85 percent of state capital gains tax revenues originating in Seattle.

Councilmember Lisa Herbold proposed amending Pedersen’s proposal to increase the capital gains tax to 3 percent, which would offset the water tax and provide a modest cushion against next year’s estimated $218 million budget deficit.

After the meeting, council budget chair Teresa Mosqueda said the council decided to put off the decision on capital gains “to protect the viability of that [revenue] source,” noting that a new, local capital gains tax might increase support for the campaign to repeal the statewide tax.

Councilmember Sara Nelson said during the meeting that she showed up “prepared to vote against this today. And I just wanted to make sure that I got this on the record if it does come back” in the future, she added.

“People aren’t filling up my inbox complaining to me about the water tax,” Nelson said. “They’re complaining primarily about crime and homelessness and other issues that Seattle is facing and wondering why aren’t we doing more about these issues.” 

If the council’s goal was “really to help low -income people,” Nelson continued, the city should be “working harder to enroll them into our utility discount program,” which provides a 50 percent discount to eligible residents. Unlike the proposed utility tax repeal, however, the utility discount program requires a lengthy application process, and is only open to very low-income residents: For single people, the cutoff is a little over $41,000 a year, and a two-person household has to make less than $54,000 to qualify.

Pedersen said his intent in proposing both tax proposals was to make the city’s overall tax system less regressive. “As a centrist who cares about business in the city and worked really hard on public safety issues here in the city, I support a capital gains tax,” he said. “I think it’s fair, and we should do it…. And I think we could also repeal the water tax. We could do both.”

Whether the council will do either is now up to the incoming council, which will no longer include Pedersen, Herbold, or Mosqueda. Nelson, who actively campaigned for several of the council’s new centrist majority, reportedly wants to be council president, a role that would give her authority over how (and whether) legislation moves through the committee process.

The budget committee did pass two proposals imposing new transparency requirements on the budget process on Tuesday, along with an ordinance requiring human services providers that receive funding for worker wage increases to spend that money only on worker pay, not for other purposes.