Tax windfalls create rare chance to fix tax code

The latest revenue forecast for Washington state government came in like a truckload of freshly minted cash.

The expected $1.3 billion revenue surge in state tax collections over the next three years has pushed the state’s predicted long-term operating reserves to $3.7 billion.

Though many politicians say government should budget like families do, that is not a great idea in this case.

We all know that families getting this kind of financial news might buy a boat. A very, very big boat.

But instead of buying yachts or cutting taxes for the wealthy, our Legislature should use this rare chance to rethink the state’s messed-up tax code. They could make the tax system fairer to those on the bottom half of the income scale, fairer to small businesses, fairer to manufacturers, and more balanced all the way around.

The growing reserves expected in state accounts can cushion the impacts of any reform.

A cut in property taxes could easily be part of the mix. But lawmakers should also impose a new capital gains tax or a carbon tax on fossil fuels, buy down a portion of public-pension debts, and invest another $1 billion to answer court-mandated investments in K-12 public schools.

They could also – potentially – cut the rates of other taxes that hinder business expansion and land most heavily on those who are poorest.

By all accounts there is enough cash to allow big-picture thinking. An estimated $647 million more will flow into state accounts through June 2019 than was assumed only three months ago. Another bonus of nearly $660 million is predicted in the two-year budget cycle that follows, according to Thursday’s forecast from the Office of the Revenue Forecast Council.

Some House Democrats recently submitted a proposal to enact a capital gains tax, which was good. Their proposal appears not to cut property taxes immediately, which minority Republicans are eager to do.

A Senate proposal being crafted could take about $300 million from the state’s Rainy Day Fund for property tax relief but that relief would likely not come this year either. To tap that reserve account, majority Democrats would need GOP support.

There is a case for a one-time property tax cut this year. A major flaw in the Legislature’s K-12 school funding reform of 2017 was that it created a double-tax on property for 2018 only. Most Washingtonians saw that double-tax whammy last week when they opened tax notices from the local county tax collector.

This doubling happened because local school-operations levies that help pay basic education costs are phased out starting in 2019, but a significant increase in the state’s separate property tax for schools kicked in this year.

Most of the fault for that one-year tax spike falls on Republicans. In their effort to reduce local tax levies and align school funding with the Supreme Court ruling in the McCleary case, they erred. The GOP rejected reforms that could have filled the gap with a new tax source. They also insisted on delaying full funding of teacher salaries at the state level.

Democrats now control both the House and Senate, and they should think in larger terms.

A capital gains tax would not be collected right away, but eventually it would produce more than $1 billion in a typical biennium. It is an alternative to a traditional income tax that we’ve long advocated for. Because there is no tax on income such as wages in our state, a levy on capital gains would bring balance to the tax code by taxing those most able to pay.

This money – some of which would come from super wealthy individuals like Bill Gates or Jeff Bezos – could be reinvested in the schools, universities and government programs that helped make the Northwest economy such a place of opportunity for these entrepreneurs to build their business empires.

Profits from the sale of primary residences would be exempted under Gov. Jay Inslee’s capital gains proposal and a small percentage of residents would pay it. Moreover, the tax could be structured to apply the 7 percent tax to only the portion of windfall gains that exceed $25,000 a year for an individual and twice that for couples.

Surely, if Republicans and Democrats are looking out for the greater good of our state, they can make our state’s tax system fairer while investing in programs that get results and still have money left over to cut other taxes.

There is no reason not to do the right thing.