Editorial: Capital gains tax could offer property tax relief

By The Herald Editorial Board

The news that the latest revenue projection for the state forecasts $1.3 billion in additional revenue during the next three years could mean that property taxpayers could get some relief — eventually — from the spike they are seeing this year in their tax statements.

That spike was the result of the “levy swap” adopted by the Legislature to resolve the court mandate to take responsibility for K-12 basic education funding by increasing the state levy for schools, while capping what local school districts could seek in their own levies.

The forecast works out to $628 million more for the current two-year budget, and $660 million more for the next two-year budget. That should be enough for the final piece of lawmakers’ McCleary plan and the state Supreme Court mandate the Legislature was to have in place by this fall. Along with other pressing needs, the windfall should leave enough to buy down some of the property tax increase and provide some relief to homeowners.

Now, the cold water: That additional money only lasts as long as the state’s good economic fortunes continue, which certainly look now is if they will, at least until they don’t.

Absent that windfall, wouldn’t it be great if the state could diversify its package of taxes a tad and allow the expansion of a property tax exemption for seniors, veterans and the disabled who are most at risk of being forced from their homes because of increased property taxes and rising home values? And while we’re at it, how about a reduction in the state’s portion of the property tax for everyone else?

That’s the proposal from state Rep. Kristine Lytton, D-Anacortes, chairwoman of the House finance committee. As Democrats have done in past years, Lytton’s HB 2967 is proposing a tax on capital gains, 7 percent on the sale of investments of stock or real estate above $25,000 for an individual and $50,000 for a couple filing jointly. There are exemptions for primary residences, retirement savings, livestock, agriculture and timber lands and a deduction for the sales of small businesses.

The estimated $700 million to $1 billion in annual revenue would be used to support and expand the property tax exemption beginning in 2021 for lower-income senior citizens, veterans with a total disability rating and those retired due to disabilities. Remaining revenue would then reduce the state tax rate for all others paying property tax.

Opponents of the capital gains tax have referred to it as a slippery slope, the camel’s nose under the tent, the inevitable march to a state income tax. It isn’t. It’s a modest and targeted tax that would remove some of the tax inequity in our state caused by an over-reliance on the state sales tax and property taxes that have hit lower- and middle-income families harder than the more affluent. The proportion of taxes to income that state’s low-income and middle-class families pay is as much as seven times the rate of what the state’s wealthiest families pay.

Here’s how targeted the tax is: More than 90 percent of the capital gains tax would be paid by the wealthiest 1 percent of state residents, about 48,000 who make $600,000 or more a year, according to the Washington State Budget and Policy Center.

The bill had its first public hearing before the House finance committee on Friday. For an hour, speakers had a minute to express support or opposition. Among those notable for their support were many who said they would be taxed under the proposal. Peter Miller, owner of Seattle’s Essential Baking Co., said the tax isn’t going to drive him out of the state or make him less likely to invest. “It’s not going to effect my decision to hold an asset to avoid a tax,” or make investments in his company, Miller said.

One criticism that has stuck previously is that revenue from the capital gains tax can be volatile and is at the mercy of the stock market and real estate. And that could be a concern if Lytton were proposing the tax as a revenue source for the state’s general fund. Instead, Lytton would use it first to protect vulnerable home owners and then to lift some of the burden off other home owners. In those years when the tax fails to generate significant revenue, home owners might see less of a property tax break, but the state would not be hit with a loss of revenue and then be forced to make budget cuts and layoffs.

While we’re on the subject, concerns about unreliability haven’t moved lawmakers to consider an alternative to the sales tax, which got a good chunk of blame during the state’s last economic downturn for forcing cuts and layoffs, in particular to mental health and psychiatric services that the state is just now better addressing.

With slim one-vote Democratic majorities in the House and Senate, the bill’s success is far from certain and would benefit from some support from Republicans, who in previous years have shown little or no interest in a capital gains tax.

What could get some GOP buy-in for the capital gains tax is Democratic support for legislation also now before the House finance committee. HB 2497 would give the same business and occupation tax break that Boeing was given in 2013 to many rural manufacturers, providing economic assistance to regions of the state that haven’t seen the same level of growth that the Puget Sound region has enjoyed. It’s a horse-trade worth considering.

And it’s just something to think about as you go over your property tax statement this month.