One way to get off the revenue roller coaster

By Remy Trupin

For Washington to be a state that creates jobs, builds a strong economy and has the quality of life its residents love, it takes resources.

The problem is that after the nation’s worst recession and its aftermath, it’s clear that investing in schools, transportation, public safety and other necessities takes more than Washington has.

One way to respond to this is to give up the values we cherish and continue to cut support for community services that have made Washington such a good place to raise a family and run a business.

Here’s a better idea: Make changes in our state tax system that could bring in much-needed revenue to invest in the building blocks of a strong economy and great quality of life — and also help make sure that the next time the economy goes sour, we’ve got some cash saved up to cushion the blow.

In the process we’d be making Washington’s source of revenue for public services more stable and equitable. Today — and this is part of the reason the recession hit our state finances so hard — Washington relies too much on the sales tax. In tough times, people buy fewer things so sales tax revenues can plummet just as public needs rise. And even in the best of times, it’s still true that the lower your income, the higher share of it you pay in sales taxes.

Having a revenue source that is more closely tied to people’s ability to pay is arguably a sound policy change all on its own. But doing it in a way that provides substantially more resources for the public good makes that much more sense.

Without a doubt we need revenue in the short-term to triage the devastating cuts on the table. Just as importantly, we need to ensure that we are able to maintain our vital public structures over the long-term.

Here’s how to get off the revenue roller coaster and make the investments Washington needs: Create a 5 percent tax on capital gains. This would address some of the long-term structural problems with our revenue system.

Capital gains are the profits people amass from selling stocks, bonds and other assets. The vast majority of capital gains, year in and year out, are made by a relatively small slice of the population. In fact, the richest 1 percent alone receives more than 75 percent of capital gains. These are by far the wealthiest Washingtonians — the only people who have seen their share of income rise in recent years and who have gotten the most back from a decade of federal income tax cuts.

But this proposal is not to tax all capital gains. For example, the first $10,000 of anyone’s yearly capital gains could be exempt from the tax. The profit from the sale of all real estate transactions could also be exempted.

Under this plan, for 97 percent of Washington households there would be no tax increase at all.

This tax on profits from high-end financial transactions wouldn’t affect your retirement savings, the sale of farmland or charitable giving. It is easy to administer and does not require any new bureaucracy, so very little of the proceeds would go for overhead.

The idea of taxing capital gains is not new: 42 states have already figured out that capital gains are a revenue resource that makes sense. Our neighbor Oregon taxes capital gains at 11 percent, and in Idaho, the rate is 7.8 percent. The proposed 5 percent rate for Washington would keep our state highly competitive.

Recent research from the nonpartisan Center on Budget and Policy Priorities found that a capital gains tax played a significant role in the faster-than-expected revenue recovery of several states. Even during the depth of the recession in 2009, there was nearly $6 billion in profits generated from the sale of capital assets in Washington state.

Like most other states, Washington suffered a major drop in state revenues during and after the recession. Over the past three years, more than $10 billion has been cut from support for schools, hospitals and health care. Furthermore, the state Supreme Court recently held that there has been a structural underfunding of our K-12 system. We are not meeting our constitutional duty to fully fund education, and our children are paying the price.

During good economic times we can harness the rapidly growing nature of capital gains to improve our investments in health care and education. And, by devoting a portion of revenues from the tax to the rainy day fund, we can maintain funding for these investments during recessions, when they are most needed. In doing so, we would create a more stable and adequate system of financing our shared priorities.

That’s money for K-12 education, to meet our constitutional duty and make sure our students are learning the skills they need to compete in today’s global economy. That’s money for higher education, so middle-class kids can once again afford to go to college. That’s money for our most vulnerable, so seniors and people with disabilities can see a doctor when they need one. That’s money for transportation, public safety and other essential community services that drive our economy and our quality of life.

Critics who argue for reform before revenue are missing the point. Our revenue system is exactly what needs reforming. Real reform isn’t about starving government or lowering expectations, real reform means making our government work for us — doing what is right for Washington families. Right now we have an opportunity to do just that, by getting off the budget rollercoaster and making the system more equitable, more balanced and more stable.

A capital gains tax is a meaningful reform that would improve Washington’s ability to invest in jobs and a strong economy crucial to our state’s quality of life. At the same time it takes a big step toward a state revenue system that is more productive, reliable and equitable than what we have today.

We’re all in this together. Now is the time to do what’s right for our future and our families — just as those who came before us made the investments we benefit from today. We elect a governor and legislators to be stewards of our state’s economy. We need them to see that a modest capital gains tax is a long-term structural reform that works for Washington.

We have an opportunity in this legislative session to make a change that will serve the public good for years to come.

About the author

Remy Trupin is executive director of the Washington State Budget &Policy Center, an independent, progressive policy organization founded in Seattle in 2005.