It is like an undercard bout leading to the main event. Washington’s capital gains tax passed a test of sorts Tuesday when the U.S. Supreme Court declined to hear a challenge to the measure, but a more significant battle looms.
Since being passed by the Democratic-led Legislature in 2021, the capital gains tax has endured much criticism and survived a challenge in the Washington Supreme Court, which deemed the tax permissible under the state’s constitution. The tax also has raised approximately $900 million during its eight months of implementation, far exceeding projections.
But in order for the capital gains tax to become fully entrenched, state officials must engage in public relations by ensuring that revenue goes to schools as intended and that the public sees a positive impact. In November, after all, the issue likely will be in the hands of voters.
Opponents of the tax say they have collected enough signatures to land the issue on the general election ballot. And as Michael Gallagher, president of the Washington Policy Center, said following the U.S. Supreme Court decision, “The good news is that over 400,000 Washington citizens have already seen the damage this tax has done and raised their voices to fellow citizens.”
Tax policy is particularly contentious in Washington. The state Supreme Court ruled in the 1930s that an income tax violated the state constitution, helping to establish a tax system that today is regarded as the nation’s most regressive.
Nearly a century later, that ruling did not prevent the Legislature from creating a workaround. Lawmakers placed a 7 percent tax on profits above $250,000 from the sale or exchange of stocks, bonds and other investments. The state Supreme Court ruled last year that this is an excise tax rather than an income tax, allowing it to stand.
If Democratic lawmakers hope to convince voters to maintain the tax in November, they must demonstrate that they are as efficient at spending money as they are at collecting it.
Under the legislation, the first $500 million from the capital gains tax each year goes into the Education Legacy Trust Account, which can only be spent on public schools. Any excess goes to the state’s construction budget, specifically for school projects. There will be powerful temptation to alter those provisions and use the windfall for other needs; but spending the funds on anything other than schools would be fiscally irresponsible.
State Sen. Mark Mullet, D-Issaquah, who is running for governor, last year told The Seattle Times: “I think the focus will be how those dollars can help support those districts with lower property valuations.” There also is room for bolstering the Small District and Tribal Compact Schools Modernization program and for assisting districts that have low property tax bases but are too large to qualify as a “small” district.
Meanwhile, advocates of the tax should avoid the kind of rhetoric that came from Invest in Washington Now. In a press release lauding the U.S. Supreme Court decision, the organization claimed the lawsuit would take away $900 million a year from kids and “give it to Washington’s mega-rich.” This ignores the fact that the money belonged to those taxpayers until a new tax altered the dynamic.
Drawing class distinctions will do little to convince voters that a capital gains tax is not only beneficial to the state, but fair to those who pay it. And that is important to the election battle that will decide the fate of Washington’s capital gains tax.
