OLYMPIA — The judges had their say, and now it’s voters’ turn.
On Nov. 5, via Initiative 2109, Washingtonians will decide whether to keep or repeal the state’s tax on capital gains, which is aimed at high-dollar profits from the sale or exchange of certain assets like stocks and bonds.
Those who want to keep the tax in place, including teachers’ unions, say passing the initiative would put hundreds of millions of dollars for education at risk. The money has helped the state fund two of its major programs that support low- and moderate-income families with child care needs. Advocates also say the tax helps tilt Washington’s tax system in a fairer direction, requiring the wealthy to pay more.
Brian Heywood, the Redmond hedge fund manager who is spearheading the repeal effort, says the capital gains tax hampers Washington’s business climate and is a gateway for legislators to levy more taxes.
The results on Initiative 2109 will settle the long-simmering question of the tax’s survival. Opponents had challenged the tax in court but lost before the state Supreme Court last year. In January, the U.S. Supreme Court declined to take up the issue.
Where does the money go?
Every year, the first $500 million is slated to go toward education. Because capital gains tax revenues can be volatile, lawmakers required any revenues above that to go to school construction projects — since they are one-time investments rather than ongoing programs.
Washington collected $848 million in capital gains taxes in the 2023 fiscal year and $361 million the next, according to the state Department of Revenue. In Washington, fiscal years begin July 1 and end June 30.
The same year they created the capital gains tax, legislators passed the Fair Start for Kids Act, which aimed to make early education and child care more affordable.
The capital gains tax, advocates say, allowed the state to put more public dollars toward early learning, with much of that investment going toward two of the state’s major programs for lower-income families.
The first is called Working Connections Child Care, which helps families access day care for kids 0-12 years old at a cost subsidized by the state.
Fair Start for Kids raised the amount families could earn and still qualify and it capped what they pay for the child care.
Roxy Magno, director of outreach services for Multicultural Child and Family Hope Center in Tacoma, said the cap on Working Connections fees has been “incredibly beneficial.” Before, parents may have qualified for Working Connections but still faced high monthly copays.
If a parent wants to work or go to school, they need child care, Magno said. Now they “are able to have a little bit of an ease of mind” that they can go back to school or pursue careers.
Fair Start for Kids also raised income limits for the Early Childhood Education and Assistance Program, which is Washington’s free preschool program for 3- to 5-year-olds.
While most of the slots go toward children from low-income families, up to 10 percent can be filled by children from families who are above the income limits but have other needs — for instance, if they are experiencing homelessness, or their child has a disability and is eligible for special education services.
For Catie Dabney, whose older son, now 6, was diagnosed with autism, this program provided teachers who were trained to support children with extra needs and a family support specialist to check in regularly, they said.
Their son “just seemed to thrive more in the classroom” than he had before, Dabney said.
Genevieve Stokes, director of government relations for Child Care Aware of Washington, says many states saw federal dollars dry up after the pandemic and saw a “precipitous cliff” in funds available for child care.
But because of the capital gains tax and the Fair Start for Kids legislation, Stokes said the Legislature was able to “build a strong foundation to support families furthest from opportunity and keep the bottom of the child care industry from falling out.”
“Retracting the promise on this revenue will really take us backward from supporting families who are already challenged by child care shortages, unaffordable costs and from helping child care businesses to survive in this economy,” she said.
Heywood said in an interview that child care is expensive in Washington because the state regulates it too heavily, pointing to a college degree requirement as an example.
Child care workers don’t need a college degree, but directors, assistant directors and program supervisors are required to have a state certificate in early childhood education or an equivalent credential or credits, according to the Department of Children, Youth and Families.
Stokes said the most expensive cost for child care is labor, and those costs are driven by the number of children each adult cares for. You could save money by having a higher ratio of kids to adults, Stokes said, but that could compromise safety.
“I’d like to know how many parents want to have 10 infants in a classroom with one adult,” she said. “There are some things you just can’t get around for safety and well-being for kids.”
Who pays the tax?
The tax is 7 percent on the profits above $262,000 from the sale or exchange of certain intangible assets, like stocks and bonds. That amount is adjusted annually for inflation.
There are exemptions: It doesn’t apply to real estate or certain retirement accounts, for example.
The campaign to keep the tax has emphasized that a small fraction of state residents pay it. So far, just under 4,000 returns have been filed annually. There are nearly 2.98 million households in Washington, according to the U.S. Census, and about 8 million people.
Opponents of the capital gains tax say it’s not a reliable source of revenue and taxpayers adjust their behavior to avoid paying it. They argue it hurts businesses in Washington, which has been a cradle for commerce giants like Amazon and Starbucks.
Heywood points to Jeff Bezos, the founder of Amazon, who relocated from Seattle to Florida, which has no capital gains tax, last year.
Bezos said he moved to be closer to his parents and to Cape Canaveral, where his rocket company Blue Origin was “increasingly shifting” its operations. He hasn’t said he moved for tax reasons.
But in February, he sold 12 million Amazon shares, worth just north of $2 billion.
“His actions speak louder than his words,” Heywood said.
The campaign to keep the tax points to research on millions of tax filings between 1999 and 2011 finding that a smaller share of millionaires — 2.4 percent — move states annually than the general population does, at 2.9 percent.
Heywood said the capital gains tax was “a stupid tax” because it would “beat up” the state’s economy and would hurt the programs the state is spending money on. Revenue from the tax took a substantial dip between its first and second years.
As revenues decline, Heywood believes lawmakers will expand the tax beyond the state’s wealthiest residents.
“They’ll have to either get rid of the tax, which they won’t do because they’ll never do that,” Heywood said, “Or they have to expand it significantly to the middle class, and that’s what’s going to happen.”
