A new proposal for taxing capital gains in Washington state

The plan would impose a flat tax, after exempting capital gains of up to $10,000, thus affecting only the top 3-12% of taxpayers. Political obstacles are formidable, but may be lessening.

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The plan would impose a flat tax, after exempting capital gains of up to $10,000, thus affecting only the top 3-12% of taxpayers. Political obstacles are formidable, but may be lessening.

A Seattle think tank unveiled today (Nov. 3) a proposal to create a Washington capital gains tax to help combat the state's likely long-term budget woes by raising about a $1 billion a year.  There's a huge question mark whether this proposal is politically feasible.

After all, Gov. Chris Gregoire and Republican and Democratic legislative leaders overwhelmingly ruled out new taxes in the last legislative session, although Gregoire gave a slight hint recently she might consider a tax increase proposal in view of the state legislature's getting ready to deal with a predicted $2 billion budget shortfall for 2012. Also, state voters rejected by two-to-one a proposal in November 2010 to levy a state income tax on people earning more than $200,000.

The Washington State Budget and Policy Center announced the proposal this morning. Remy Trupin, the center's executive director, said the proposal is so new that the center has not yet yet approached any legislators to be the measure's "champion."

Trupin and Andy Nicholas, a policy analyst for the "progressive policy organization," outlined the proposal as creating a flat-rate capital gains tax while exempting anyone making less than $5,000 or $10,000 in annual capital gains income. They contended that translates to 88 percent to 97 percent of taxpayers not paying any extra tax. They also speculated that an amendment to Washington's constitution could send up to 50 percent of this new income to the state's "Rainy Day Fund" to handle future budget shortfalls.

Trupin and Nicholas described their proposal as a long-term revenue reform independent of near-term measures to deal with the state government's new projected billion shortfall.  They described the capital gains incomes of Washington's residents as a fast-growing, untapped, potential revenue stream. The center calculated that capital gains income in Washington grew from $7.4 billion in 2001 to $23.7 billion in 2007 — an annual growth rate of 21 percent. Meanwhile, the state's taxable retail sales grew by 5 percent annually in the same period, the center calculated. Trupin and Nicholas contend that the stock market and capital gains incomes are more resilient and recover faster in a recession than employment, wages, and spending.

The center's figures estimate that a 1 percent capital gains tax with exemptions for less than $5,000 in capital gains income would provide the state an extra $106 million annually; a 5 percent tax with a $5,000 exemption would provide $532 million a year and a 10 percent tax would raise $1.1 billion annually.

Washington is one of six states with no capital gains tax, according to the center. Twelve states have capital gains taxes of 5 percent or less. Twenty-eight states has capital gains taxes greater than 5 percent. The rest have similar taxes that are not easily categorized.

Trupin and Nicholas said the proposal would not deduct new taxes from paychecks, not affect retirement savings and incomes, and not affect inherited investments.

Democrats have a political skittishness about creating new taxes or increasing taxes in the wake of recent vehement voter dissatisfaction with such measures. Republican legislators have dug in against any type of tax hikes. Initiative 1058, passed last November, while other tax increases were being nixed by voters, requires a two-thirds majority in both the state House and Senate to pass any tax hikes. Republicans control more than one-third of each chamber, and took a highly-disciplined opposition to any such tax proposal in the last session.

State Sen. Joseph Zarelli, R-Ridgefield and ranking Republican on the Senate Ways and Means Committee, said Republican senators have not been approached about the capital gains tax proposal. Zarelli opposes a capital gains tax and believes fellow Republicans would also oppose it. The House Republican caucus leadership said through a spokesman that it opposes a capital gains tax. The appropriate Democrat legislative budget leaders were not available for comments Thursday. Democratic caucus spokespeople were unfamiliar with the capital gains tax proposal.

Trupin hopes this opposition to tax proposals might be changing view of the state's budget woes not going away despite draconian cuts in the last session. "The Republicans are being real clear that they recognize this is a new game," Trupin said. Trupin and Nicholas noted that Democrat legislators can take a tax proposal directly to the voters on a referendum with simple majorities on both chambers.

  

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John Stang

John Stang is a freelance writer who often covers state government. He can be followed on Twitter: @johnstang_8