Washington Supreme Court Greenlights Capital Gains Tax on Wealthy to Pay for Early Education, Child Care

by Guy Oron

(This article was originally published on Real Change and has been reprinted under an agreement.)

On March 24, the Washington Supreme Court ruled 7-2 that the capital gains tax passed by the Legislature in 2021 is legal, paving the way for new funds to go toward education. The tax is due on April 18 and applies to anyone who makes more than $250,000 from sales of investment assets.

Washington joins 41 other states and the District of Columbia in having imposed taxes on capital gains. Unlike those states, however, state lawmakers tailored the bill to count as an excise tax, applying only to the trade of investment assets such as stocks and bonds but not other forms of capital gains such as dividends or interest.

The court concurred with this reasoning, agreeing that the new tax is akin to other excise taxes such as those on the sale of real estate. The tax is allowed to target a narrow band of wealthier taxpayers, the majority of the court wrote.

Two members — Justice Sheryl Gordon McCloud and Justice Charles Johnson — dissented, claiming that capital gains are by definition income, and therefore property. The two justices wrote that the state constitution limits property tax to an annual limit of 1%.

According to Andy Nicholas, a senior fellow with the Washington State Budget & Policy Center, the tax will raise about $250 million in receipts from 2022. It is also projected to raise more than $500 million a year for the 2023—2024 biennium state budget. This money will go to the Education Legacy Trust Account, a funding mechanism to support early childhood education, K—12 schools and higher education institutions.

A big section of this new funding is slated to go toward the Fair Start for Kids Act, a plan to provide child care for low income families with young children. With the new law, which was passed in 2021, the state will offer subsidies to qualifying low-income families, as well as ensure minimum quality standards. The law is also designed to help expand existing child care services, including targeted aid to providers working in Communities of Color.

Dr. Stephan Blanford, the executive director of the advocacy group Children's Alliance, said that the capital gains tax will be a big boost for early childhood education.

"Brain research says that kids that have access to high-quality early learning do a whole lot better while they're youngsters, and then when they get in the K—12 system, they do a lot better," Blanford said. "So they graduate at higher rates: They're able to get jobs that take care of their families."

Blanford added that the current pre-school education system is very inconsistent. Many areas of the state fare worse than others due to the lack of child care.

"It's really an equity issue, where we want to ensure that every child in Washington state has access to high-quality [care]," Blanford said. "There are lots of places throughout the state where there are child care deserts, where there's no child care available or that child care is very low quality."

Blanford also said that the state needs to look at ways to improve child care providers' wages and conditions to ensure adequate staffing. Child care workers, who are often Black and Brown women, are significantly underpaid, he said.

The new tax is set to impact around 7,000 of the wealthiest taxpayers in the state, roughly 0.1% of the state's population. This would help correct Washington's regressive tax structure, Nicholas said.

According to the Institute on Taxation and Economic Policy, the state ranks as the most regressive tax structure in the country, meaning that poor and working class people pay a far greater share of their income on state and local taxes than rich people. For the lowest 20% of earners, who make less than $24,000 a year, state and local taxes account for 17.8% of their family income, compared to just 3% of the top 1% of earners, who make more than $545,900 a year.

Alongside the funding of the Working Families Tax Credit, which allows low- and middle-income residents to opt into a tax refund of up to $1,200, the tax changes would lower the burden for low-income families to 13.9% of their income and increase it for the highest-income ones to 4%, Gov. Jay Inslee's office wrote in a blog post.

Not all Washingtonians were on board with the new tax, however. In addition to the wealthy plaintiffs who sued to try to block the new measure, the Republican party and right wing think tanks came out in opposition to the ruling, including the pro-business Wall Street Journal editorial board.

Jason Mercier, the director of the Center for Government Reform at the Washington Policy Center, said that the state Supreme Court's ruling was at odds with the policies of other states and countries, which view capital gains as a form of income.

"For the past decade, I have contacted every state revenue director in the country, I exchanged letters with the IRS, reviewed tax codes in other countries: All of them came back saying the same thing," Mercier said. "This is clearly an income tax. So it was surprising to me to see that Washington officials could not grasp this."

Mercier said that the Supreme Court's decision could pave the way for future tax increases, such as the 1% wealth tax that was cosponsored by a large portion of the state Democratic caucus this year.

"Prior to the ruling on Friday, I would unequivocally tell you that, as proposed, that wealth tax was unconstitutional," Mercier said. "But now that I've seen the ruling in the capital gains tax case, I don't know what our court would do with a wealth tax."

Mercier said that, while there is some talk of trying to appeal the case up to the U.S. Supreme Court, which has an ultra-right wing supermajority, the most likely route for opponents will be to run an initiative campaign to get voters to overturn the tax.

Progressives such as Northwest Progressive Institute (NPI) founder and executive director Andrew Villeneuve relished the prospect of such a fight, saying that the capital gains tax is very popular among voters.

"There was a threat of [an] initiative, briefly, but the right wing pulled the plug on that because their own polling showed that it [the tax] was popular," Villenueve said. "So they sort of implicitly or tacitly conceded that we're right, that it's popular because they didn't want to threaten it at the ballot … they're basically out of options in terms of how to overturn the tax. The only thing I think they could do at this point would be to restart their initiative, but I don't think they're going to do that."

Villenueve also said that the prospects for the wealth tax were very bright, with NPI's polling showing that 67% of voters supporting it, making the proposal even more popular than the capital gains tax.

While the court's confirmation of the capital gains tax was an important win, progressive advocates said that much more is needed to be done to rebalance Washington's regressive tax structure and ensure quality education for all.

"We were celebrating very hard last week when we got the news of the Supreme Court's decision," Blanford said. "But we went right back to work because there's still a lot of reform that needs to happen in the state in order to ensure that all of the kids in the state have a really good chance to reach their potential."

Featured Image: Washington became the 42nd state to impose a tax on capital gains in 2021. Revenue from the sale of investment assets totaling more than $250,000 will be taxed at 7%. (Map: Guy Oron and Henry Behrens/Datawrapper.)