Democrats Include Capital Gains Tax in State Budget Proposals

by Leo Brine

(This article was originally published on PubliCola and has been reprinted with permission.)

Washington State Senate and House Democrats unveiled their operating budget proposals for the 2021—23 biennium late last week. Both budgets included the capital gains tax (SB 5096), signaling that Democrats expect the House to pass the dramatic bill and Gov. Inslee to sign it.

Senators passed the capital gains tax on March 6. The House Finance Committee has held a public hearing for the bill but has yet to pass it out of committee and send it to the House floor. The lead budget writer, Sen. Christine Rolfes (D-23, Bainbridge Island), said Democrats included the tax in the budget because the bill had, for the first time, passed the Senate, and "it's the Senate's practice to book [earmark] revenue that we passed."

Rep. Noel Frame (D-36, Seattle) said she's confident the House will pass the bill which she said is why it is included in the House's proposal. "We booked it in the budget in years past," Frame said. "We built it into the budget this year, and we are confident it will continue to move."

Legislators in the House and Senate expect the 7% tax on capital gains of more than $250,000, which takes effect in July 2022, to generate more than $350 million a year beginning in 2023. Rolfes said the revenue generated from the tax in the Senate's proposal would eventually help fund the Taxpayer Fairness Account, which provides funding for the working families tax exemption for low-income Washingtonians (HB 1297).

Rolfes said the budget allocates the first $350 million to the Education Legacy Trust Account, the second $100 million to the State's general fund, and the remaining amount to the Taxpayer Fairness Account. However, beyond the initial $350 million, Democrats aren't assuming additional revenue for the next four years yet due to the unpredictable nature of the tax.

Republicans hope to challenge the bill up to the Washington Supreme Court — they have been referring to it as an unconstitutional income tax for some time. However, a court case could backfire: The court could determine the tax is constitutional and, in the process, overturn the 1930s Supreme Court decision establishing that graduated income taxes are unconstitutional. Democrats, the GOP fears, would then be able to propose and possibly pass income tax legislation.

Without the emergency clause that was originally part of the bill, citizens could also petition for a referendum vote to block the tax from becoming law. "As you know, we took off the emergency clause in the Senate," Sen. John Braun (R-20, Centralia) said at a press conference on March 16. By removing the clause, the bill became vulnerable to a referendum that, if successful, would put the bill on the November general election ballot, leaving it up to citizens to determine if the bill would become a law.

Braun said he has heard rumblings in the House that representatives may add the emergency clause back on the bill. However, even without the emergency clause, citizens could still propose an initiative that could undo the tax; filing an initiative requires twice as many signatures.

At the budget proposal press conference, capital gains tax sponsor Sen. June Robinson (D-38, Everett) said she would work to pass whatever version of the bill the House sends back to her, including one with an emergency clause. The Senate passed the bill on March 6 with a 25-24 vote mostly along party lines, with the exception of moderate Democrat Sens. Steve Hobbs (D-44, Lake Stevens) and Mark Mullet (D-5, Issaquah), who voted against the bill. Sen. Hobbs sponsored the amendment that gutted the emergency clause with some Democratic support; the vote was not tallied with a roll call, so we don't know which Democrats supported it.

"I really trust Chair Frame and others who are in the house to work with their colleagues and pass something this year," Emily Parzybok, executive director of Balance Our Tax Code, said. "I really believe we're going to take an important step to balance our tax code this year one way or another."

Frame stressed the importance of passing the tax and including it in the budget, saying in a statement that it would alleviate the tax burden of the lowest-income Washingtonians, who spend roughly 18% of their income on taxes while the top 1% spend just 3% of their income on taxes. "The very people who need the help cannot and should not disproportionately carry the responsibility of economic recovery."

Rep. Drew Stokesbary (R-31, Auburn) issued a press release soon after the House released their budget proposal. Stokesbary said the State has enough money already, and economic recovery will depend on "innovators," despite the fact that June's predicted revenue shortfall was saved by an increase in retail sales taxes, a regressive tax that disproportionately hits lower-income residents, as PubliCola reported.

The GOP seems to ignore this populist angle. "I'm stunned the majority party would continue to push a job-crushing capital gains tax at a time when we continue to face high unemployment," Stokesbary said in a statement. "Our economic recovery will depend on private investors and entrepreneurs betting on Washington's ingenuity and hard work."

Both budgets allocate $2 billion to K—12 education, including additional funds from the federal government. Another $1 billion is for vaccine distribution, also including federal funds from the American Rescue Plan Act. Both budgets include another quarter billion dollars for public health. The House and Senate both allocate large sums of funding to rental assistance to pay off rent debt accrued during the state's eviction moratorium. Legislators also included hundreds of millions for childcare, assisted living facilities, unemployment tax relief for small businesses, and to affordable housing projects and the development of homeless shelters.

"We're fortunate right now to have a resilient economy," Rolfes said when the Democrats unveiled their budget proposal Thursday afternoon. "We're on track for recovery. We're on track for continuing the policies that we've adopted that we've been building on the last few years."

Leo Brine is a Seattle-based journalist.

📸 Featured Image: Photo of Washington Legislative Building by James_Seattle (under a CC BY-SA 2.0 license).