Keep or repeal the capital gains tax? Voters will decide in November

It’s tempting to see the debate over Washington’s capital gains tax in simple partisan terms.

On the right, hedge-fund millionaire Brian Heywood is financing an initiative to repeal the tax. On the left, and even for some in the center, the wealthy pay far less than they should. This is especially true in a state without an income tax.

It is more useful to examine the capital gains tax on as an objective a path as is possible (we all have our biases, me included).

Washington imposed the tax in 2022, which applied a 7% levy on the adjusted, long-term taxable capital gains from stocks, bonds and other tangible assets that exceeded $250,000 and nothing on gains under that amount.

The receipts are intended to mostly go to schools and early learning programs.

Taxable capital gains here are based on the gains reported on an individual’s federal tax return. Beyond that, the state tax gets complicated with numerous conditions, intricacies and loopholes.

Even so, both the state and the U.S. Supreme Court declined to take up a lawsuit challenging the constitutionality of the tax.

According to the center-right Tax Foundation, a think tank founded in 1937, Washington ranks No. 28 in its 2023 Business Tax Climate Index. It noted the state’s lack of an income tax or a conventional corporate tax (although the business and occupation tax is levied on gross receipts by most companies here).

The top five states on the foundation’s list are Wyoming, South Dakota, Alaska, Florida and Montana. Almost all of these are rural states, including some with abundant oil money. None have a capital gains tax.

One gets what one pays for.

In Washington, we’re getting less than expected. As of this past month, the state netted $433 million from the capital gains tax, down from $786 million in 2023, the first year the levy was in force.

The capital gains tax has brought in a little more than $1.2 billion for the current two-year budget cycle, which runs through June 30, 2025. However, legislators expected $1.5 billion for the state’s operating and capital budgets, and $1.7 billion in the next two years.

“We need to see the complete forecast to determine the impact on the current and next budgets,” Mike Faulk, press secretary for Gov. Jay Inslee, said in an email to the Washington State Standard. “While the precise impact can’t yet be determined, it is providing important funding for education and early learning.

“Revenue from Washington’s capital gains tax is expected to fluctuate year to year based on changes in the economy, so the lower numbers are not unexpected and can be managed through the typical economic and revenue forecasting and budgeting process,” according to Misha Werschkul, executive director of the Washington State Budget and Policy Center.

Even so, as my colleague Danny Westneat reported, the tax especially falls on between 12 and 16 of the state’s billionaires.

Seattle imposed its own capital gains levy in the form of the JumpStart Tax in 2021. A Seattle Times/Suffolk University poll this past year found that a majority of respondents supported it.

I continue to argue that JumpStart is ill-advised, putting Seattle at a competitive disadvantage to other cities in the region, especially Bellevue. The city east of Lake Washington is eager to snatch up Seattle jobs and companies.

Even so, Washington’s economy remains diverse and robust. The state unemployment rate was 4.8% as of April. In King County it stood at 3.9%, a rate economists consider “full employment.”

Nationally, taxes on capital gains go back to 1913, when they were set at ordinary rates up to a maximum of 7% on the sale of an asset. One intention was to limit the establishment of capitalist “royalty,” where each generation of the wealthiest became still richer.

From there, legislation switched the rates up and down, settling on a maximum of 25% from 1954 to 1967. This also coincided with the zenith of the American middle class and corporations doing well, often locally owned, with millions employed in well-paying jobs ranging from banking to manufacturing.

Despite President Ronald Reagan’s tax cuts in the early 1980s, including reducing the capital gains rate to 20%, he signed the 1986 tax-reform law that raised it to 28%. This was continued through much of the administrations of Presidents George H.W. Bush and Bill Clinton. And while presidents often get more credit and blame for the economy, Reagan and Clinton presided over two of the biggest expansions in U.S. history.

According to the Center on Budget and Policy Priorities, a left-leaning think tank, a historically large portion of the nation’s wealth is concentrated in 5% of the richest taxpayers. Its research also found no connection between capital gains taxes and economic growth.

It also recommended eliminating the carried-interest loophole, which allows hedge-fund managers, venture capitalists and private-equity financiers to sidestep capital gains taxes.

Back in Washington, the capital gains issue will be decided in November, a historic election from the presidential level on down.

Many can argue with some evidence that both Seattle and the state haven’t done enough with the money they’ve received from taxpayers. That asking for ever more revenues isn’t the answer.

But this is a state with many needs and requirements, including early education, kindergarten through high school and child care — the Center on Budget and Policy Priorities called these Washington’s “bold investments.” The capital gains tax is one way to ensure they are met.

How will it turn out? The voters will decide.

Correction: An earlier version of this story misspelled Misha Werschkul first name.