Whither the capital gains tax?

Credit Senate Republicans for offering a state budget proposal to move Washington state closer to fully funding its K-12 public schools. Unfortunately, the GOP’s majority coalition relies too much on a large boost in the state property tax rate to make ends meet in a $43 billion budget.

In a bid to avoid raising other taxes or imposing a new one on capital gains, the Senate Majority Coalition Caucus budget scrimps in several areas of the budget that should not be slashed.

Among these are cuts to social services for needy individuals, including $53 million cut from the housing and essential needs program. This so-called “HEN” program helps homeless adults unable to work due to a physical or mental limitation. The Senate plan also cuts $44 million from the child-care subsidy program for low-income families and uses shifts of money between accounts to balance.

On the good side, the Senate proposal puts close to $1.8 billion of new money into K-12 schools in response to court orders and it answers a state Supreme Court ruling that said it is unconstitutional for our state to rely on local property tax levies to subsidize basic-education costs that belong to the state as a whole.

Republican Sen. John Braun of Centralia chairs the Senate Ways and Means Committee and was the lead author of the plan. Braun says it eliminates the illegal reliance on local voter-approved levy money and assures that all but one school district gets at least as much money as it does today.

But the tax plan replaces levies with a $1.55 increase in the statewide property tax rate, which is currently at $1.99 per $1,000 of assessed value. That means the owner of a $250,000 home would see his or her state property tax go up from $497.50 a year to $885, which would be offset by lower local property taxes.

This shift of taxes to the state is expected to give tax relief to owners of properties in tax-poor areas that have high local rates to make up for a small tax base. But it also means that a larger burden is placed on tax-rich school districts such as Seattle.

In short, it trades the unfairness of the tax code that afflicts rural areas today for unfairness targeting urban areas tomorrow.

There is a better way. A capital gains tax, which Gov. Jay Inslee proposed as part of his plan to raise billions in new funding for schools, is a tool that could help bridge differences between the Democratic governor’s more expensive budget plan and the Republican plan. House Democrats are expected to release their budget plan as soon as Monday, and including a capital-gains tax would be smart.

Washington’s tax system is simply upside down and unfair to those residents who lack much earning power. Those at the bottom of the income ladder pay a much higher share of their resources in taxes. Those who are wealthiest get off relatively lightly. This is in part due to our state’s lack of an income tax, which voters have rejected repeatedly.

Our state instead relies on sales, business and property taxes that either are paid by shoppers or passed on to them as higher prices for goods or higher rents. This is why Washington is known as the state with the most unfair or regressive tax system in the country.

Many feel taxes are already too high. But Washington’s overall state and local tax burden is not high compared with other states. When calculated as a share of the state’s aggregated personal incomes, our state and local tax burden ranks in the bottom third of states. The problem is how our tax is raised and who feels the sting most.

A capital gains tax would provide additional money for schools and social services while making the tax code less upside down. Inslee’s proposal would apply a 7.9 percent tax only on the share of an individual’s capital gains on stocks, bonds and property that exceeds $25,000 a year. For couples the tax would apply only on the share of gains exceeding $50,000.

The governor’s proposal would also exempt homes, agricultural land and agricultural equipment.

The Washington State Budget and Policy Center, a left-leaning think tank in Seattle, estimates that more than 90 percent of the taxes would be paid by households in the top 1 percent of incomes (in other words, more than $600,000 a year).

If such a tax were enacted this year, it would raise $800 million in the second year of the budget. The wiggle room would also let lawmakers enact a smarter budget with fewer cuts, fewer fund raids and a smaller increase in the state property tax rate than the GOP proposes. Importantly it would also make our tax code slightly fairer.

This story was originally published March 23, 2017 at 8:51 PM with the headline "Whither the capital gains tax?."