NPI's Cascadia Advocate

Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's unconventional perspective on world, national, and local politics.

Tuesday, May 4th, 2021

All Washingtonians will benefit from our new state capital gains tax, even those who pay it

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.

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