Later today, Washington State Governor Jay Inslee will sign into law Engrossed Substitute Senate Bill 5096, NPI’s top legislative priority for the last few years. ESSB 5096 will — at last! — levy a state capital gains tax on the wealthy, which will benefit Washington’s youth via the Education Legacy Trust. That’s the same account where estate tax proceeds have been deposited for decades.
The signing of ESSB 5096 will be a watershed moment for progressive tax reform in Washington State. Although our new capital gains tax on the wealthy still has to survive legal challenges and a potential ballot measure challenge, it is nevertheless a huge victory for our state’s common wealth worth celebrating.
In addition to signing ESSB 5096, Governor Inslee will also sign a bill updating the Working Families Tax Credit, which will lower the tax obligations of a large number of low income Washingtonians (ESHB 1297).
In honor of the signing of these two landmark bills, we’ve prepared a set of rejoinders to many of the bad arguments that we’ve heard voiced against the idea of levying a state capital gains tax on the wealthy. We heard many of these arguments last month when ESSB 5096 was on the floor of the House and Senate, and we expect to hear many of them again today from Republicans vociferously opposed to righting our upside down tax code. Enjoy!
Bad argument: A state capital gains tax is unconstitutional.
The reality: Nowhere in the Washington State Constitution does it say that the people of Washington cannot levy a state capital gains tax on the wealthy if they wish. It is true that in 1933, a closely divided Washington State Supreme Court struck down an initiative to create a graduated income tax in Culliton v. Chase. However, that decision did not hold that taxes on income or wealth were unconstitutional. Instead, the Court’s holding was that a graduated income tax did not comport with the Constitution’s requirement that taxes on property be uniform. (Income was interpreted by the court to be property.) The Legislature considers the tax levied by ESSB 5096 to be an excise tax, and legal scholars like the University of Washington’s Hugh Spitzer have warned opponents that they could be in for a rude awakening if their expectation is that the courts will strike down ESSB 5096 based on the logic in the decades old Culliton v. Chase case.
Bad argument: It’s not a good time to levy a state capital gains tax.
The reality: It’s evident from opponents’ comments that the timing is irrelevant to them: they will be just as opposed to levying a capital gains tax on the wealthy next session (or in, say, five years) as they are today. As far as opponents are concerned, there will never be a good time for the wealthy to pay their fair share.
Bad argument: A state capital gains tax on the wealthy would make us dependent on a volatile revenue source, so we shouldn’t levy one.
The reality: Many sources of existing tax revenue are volatile, including our main source of tax revenue — the sales tax — which is linked to consumption and is very regressive. Fortunately, we have a already have a constitutionally mandated rainy day fund to protect our state treasury against revenue volatility. If capital gains tax opponents were really concerned about volatility, they’d seek to reduce our dependence on the sales tax. But they haven’t. It is not a concern for them. Rather, they are ideologically opposed to requiring the wealthy to pay their fair share. Volatility is just a veneer that they use.
Bad argument: Implementing a capital gains tax will prompt Washington’s business owners to move their operations and take jobs to Oregon or Idaho.
The reality: Both Oregon and Idaho currently levy taxes on capital gains. No business owner would be able to avoid paying capital gains tax by relocating their business to a neighboring state. More importantly, no evidence exists to support the contention that building a progressive tax code harms a state’s business climate, and that is because building a progressive tax code does the opposite: it helps create a good business climate that’s friendly to entrepreneurs.
Bad argument: Our wealthiest neighbors will respond to ESSB 5096 by packing their bags and move to tax havens like Texas or Florida, leaving us worse off.
The reality: Nick Hanauer, who is one of Washington’s wealthiest denizens, has repeatedly debunked this argument. In 2010, during a debate at the UW Tacoma, Hanauever said: “There’s this… implication, in this idea, that rich people, business people, will leave the state if the income tax goes up, that offends me. Because it assumes that people like me are money-grubbing sociopaths… who don’t care about anything but what we get to keep in our checkbooks. That we don’t care about the public good. That we don’t care about investing in our schools. That we don’t care about clean water, or clean air. That if you make it slightly more expensive for us, we will run… we will run. And it’s not true.”
In 2017, Stanford’s Cristobal Young wrote a book affirming what Hanauer said in 2010, entitled The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich. We encourage every Republican state legislator in Washington State to buy a copy of this important book though their nearest independent bookstore.
Bad argument: Engrossed Substitute Senate Bill 5096 only adds a new tax to Washington’s tax code. It doesn’t reduce anyone’s taxes.
The reality: ESSB 5096 wasn’t passed in a vacuum. This groundbreaking bill will be signed into law today along with ESHB 1297, which updates the Working Families Tax Credit. This year’s operating budget, which goes into effect on July 1st, provides funding to enable the state to implement the updated Working Families Tax Credit for the first time. In other words, in conjunction with levying a state capital gains tax, the Legislature and Governor are also taking action to reduce taxes for thousands of Washington families in the lowest income brackets.
Bad argument: Smart, crafty investors will figure out how to evade the tax.
The reality: Smart, crafty investors have no reason to want to evade our new capital gains tax, which will benefit the Education Legacy Trust. That’s because smart, crafty investors know that investing in education is one of the best investments that a society can make. They also know it is patriotic to be a taxpayer and pay your dues to your state and country. When ESSB 5096 was being considered, many Washingtonians of means testified to the need for this new source of progressive revenue and stated publicly that they are looking forward to paying it. While not every wealthy household may be enthusiastic about paying the tax, it will be easier to simply pay it than try to evade it.
Bad argument: We don’t need a capital gains tax to take care of our children.
The reality: Progressive tax reforms like this one are exactly what we need to take care of our children. NPI’s research has consistently shown that most voters in Washington agree that our schools are underfunded, and that we should raise state revenue to fully fund them. ESSB 5096 does exactly that. It gets us closer to meeting our paramount duty of ensuring that every young person in Washington is receiving a good education. 59% of Washington voters surveyed a year ago on NPI’s behalf expressed support for levying a capital gains tax on the wealthy to fund our public schools. Only 32% were opposed.
Bad argument: What we’re saying by passing this legislation is that we’re jealous of success.
The reality: Wrong! What we’re saying with this legislation is that if you’re successful, you should pay it forward and help secure the future of the region that you live in. Taxes are investments. Nobody makes it on their own in America, or anywhere else for that matter. We all get by with the help of our family, friends, teachers, coachers, mentors, and — for those of us who employ others — our workers. The workers of the world are the real profit creators. Washington workers are already paying their fair share in membership dues to the great state they live in; now, it’s time the wealthy stepped up and paid their fair share, too.
Bad argument: We are giving up our competitive advantage by levying a capital gains tax on the wealthy.
The reality: Washington’s upside down tax code is not a competitive advantage. It’s actually one of our greatest weaknesses. Though we have repeatedly been named America’s “Best State” by the likes of U.S. News & World Report in recent years, that’s not because we don’t require the wealthy to invest in Washington’s future; it’s in spite of it. By levying a state capital gains tax and offering a Working Families Tax Credit this year, we’re taking action to build a tax code that is a bit fairer and more progressive. That will result in a state with an even more attractive business climate and broader prosperity.
Bad argument: We may as well say goodbye to retirees’ investment gains.
The reality: Individual retirement accounts are exempt from our new state capital gains tax, so there’s no fiscal impact to the vast majority of retirees to even argue about. Also exempt are:
- all real estate — land and structures;
- interests in a privately held entity to the extent any long-term capital gain or loss is directly attributable to the real estate owned directly by the entity;
- assets transferred as part of a condemnation proceeding;
- livestock related to farming or ranching;
- certain types of property used in a trade or business such as machinery and equipment that have been immediately expensed;
- capital assets acquired and used only for purposes of a trade or business of a sole proprietorship;
- timber and timberlands;
- commercial fishing privileges;
- goodwill received from the sale of a franchised auto dealership.
As the above list hopefully makes clear, this tax has been designed as an obligation that only Washington’s richest households will be responsible for paying. Family farms and small family owned businesses will generally not be subject to the state capital gains tax when they are being sold.
Bad argument: This is just the beginning of an effort to raise everyone’s taxes — in the not too distant future, we’ll all be paying a capital gains tax.
The reality: This is an argument for keeping our worst-in-the-nation tax code permanently broken. Low and middle income families already pay up to 17% of their income in state and local taxes, while wealthy families pay less than 3%. That’s immoral and inexcusable. What our state needs is revenue fairness, not more bogus justifications for keeping our tax code upside down and allowing massive fortunes to continue going untaxed. When wealth is taxed, it enables those with means to participate in securing our future. They benefit from the investments their tax dollars allow along with every other Washingtonian.
Any adjustments or modifications to the scope of our new capital gains tax would require either the agreement of the House, Senate, and Governor, supermajorities of the House and Senate, or a vote of the people, which would follow multiple opportunities for public input and discussion. Washington is a democratic republic: laws are made by the people and their duly elected representatives. Let’s have faith in each other to make good, sensible decisions about our future.
If you’d like to watch today’s bill signing, it will be streamed live by TVW beginning at around 2:30 PM Pacific Time.