Republicans who want to torpedo Gov. Jay Inslee’s capital-gains tax idea have one thing right. The revenue from a levy on sales of stocks and other equity investments can be unpredictable – high in good years, far less when the economy tanks.
Just ask California, which kept spending on the eve of the dot-com bust in 2001. It never set aside capital gains windfalls – fueled by stock options in Silicon Valley – for a rainy day.
But fast-forward 14 years to Washington, and it makes little sense to use volatility as the reason to scuttle a capital gains tax proposal. That would be like dry-docking a sailboat because wind speeds on Puget Sound are not steady.
The challenge is to figure out how to incorporate a capital-gains tax, which more than 40 states have, into a Washington tax code that today isn’t diverse enough, isn’t fair and doesn’t produce enough revenue.
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Inslee proposes to raise nearly $800 million in the fiscal year ending in June 2017 and larger amounts in ensuing biennia, assuming economic growth continues.
Rep. Reuven Carlyle, the Seattle Democrat who chairs the House Finance Committee says the state has a 90 percent or better chance of receiving at least $400 million a year from Inslee’s tax plan in the long term, and he thinks the state could guard against the temptation to overspend by setting aside any revenue above a reliable level.
One possibility is do what Washington already does – stick a portion in the rainy day fund. But there are other ideas in play. Done wisely, a tax source that provides occasional surges in income could be used to cover one-time costs – such as K-12 school construction, which looms as another state obligation under the Supreme Court’s McCleary ruling on funding basic education.
Rep. Ross Hunter, the House Appropriations Committee chairman, told The Olympian editorial board last week that volatility can be used as an advantage. The Democrat wants to use above-average years’ capital gains taxes to create an endowment to pay for scholarships.
There are questions whether Inslee is calling for the right tax rate or the right size of exemption, but 7 percent would be the lowest on the West Coast. Hunter argues Inslee’s plan is “too tilted to the 1 percent”; he’d favor a lower tax rate that landed on more people, perhaps 5 percent of taxpayers.
Whose rate is best is less important initially than the creative thinking, which the Legislature needs this year as it scrapes together money to pay for state operations. The tax code certainly needs alterations so that the biggest winners in our economy share more fully in paying for government services.
“I think this is a year for the state where we could change direction,” Hunter said, referring to the tax code. “I don’t think it is true in most years. So I think we ought to think about it for a while and get it right.”
We agree. There are good minds in our statehouse – on both sides of the aisle – that should be able to come up with a tax plan that’s fairer, more diversified, and more reliable.