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Originally published January 28, 2015 at 4:51 PM | Page modified January 29, 2015 at 10:38 AM

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Guest: Gov. Inslee’s capital-gains tax idea is dead on arrival

Gov. Jay Inslee’s proposal to create a new state capital-gains tax will not be enacted, writes columnist Richard Davis. Pragmatism will prevail.

Guest columnist


An early prediction: The Washington Legislature will not adopt a capital-gains tax. That would disappoint some people — it shouldn’t.

The tax would be a mistake. It would not raise the sums boosters claim it would. It would have a negligible impact on tax fairness. It would risk driving investment out of state. And, it would make the state’s revenue system more volatile.

Gov. Jay Inslee proposed the new tax, saying he wants the state’s wealthiest residents to pay taxes on gains from the sale of stocks, bonds and other assets. He considers it a twofer that boosts state revenues and addresses concerns that Washington has the “nation’s most unfair tax system.” While he noted that 41 states already have such a tax in place, he didn’t mention that they also have a personal income tax. No matter how you parse it, taxing investment earnings is taxing income, something Washington voters have repeatedly said they don’t want.

The claim that Washington has the nation’s most unfair tax system comes from the liberal Institute on Taxation and Economic Policy, which favors progressive tax policies. We may quibble about the rankings — these things aren’t easy to measure — but the institute is right: Washington’s tax burden falls more heavily on lower-income taxpayers. It’s regressive, which the institute says is unfair. It also says, “Virtually every state tax system is fundamentally unfair.”

There’s a reason for that. Judging tax fairness on the basis of state and local taxes neglects the big picture. Income redistribution, the reformers’ goal, is inefficiently handled by the states. At the state level, high tax rates can — and, the evidence suggests, do — negatively influence investment and, over time, cause some wealthy residents to migrate to friendlier tax climes. The federal government, which spreads the burden across the entire economy, is in the best position to impose progressive taxes. It does so with relish.

A recent Congressional Budget Office report found that the poorest one-fifth of U. S. households paid 1.9 percent of their income in federal taxes; in the top fifth, the share was 23.4 percent; the top 1 percent paid 29 percent.

While state and local taxes in Washington are more regressive than the average state, the state tax-reform committee chaired by William H. Gates Sr. in 2002 reported, “When federal income taxes are added, the total tax burden in Washington is progressive.”

Those federal taxes also support state and local governments, making the overall mix progressive.

Capital-gains taxes pose an additional problem. When a similar tax was proposed last year in Olympia, state analysts wrote, “Capital gains are extremely volatile from year to year ... [depending] entirely on fluctuations in the financial markets.” So much for the governor’s projected $1.7 billion a biennium. Maybe sometimes that’s the case. But not likely and not predictably. And not without causing some taxpayers to invest elsewhere.

California’s nonpartisan Legislative Analyst’s Office wrote last year that personal income taxes, that state’s largest revenue source, “are much more volatile than statewide personal income. This is partly because California taxes capital gains, which are especially volatile and mainly go to high-income taxpayers who pay the highest tax rates.”

You just can’t count on the 1 percent. Or, maybe, you can’t count on just the 1 percent.

Capital is mobile. The states that attract it will increase investment opportunities and grow the economy. Washington is one of those states, in part because we do not tax capital gains.

We’re unlikely to begin this year.

Senate Republicans voted to require a two-thirds supermajority to pass new taxes, such as a capital-gains tax. As Inslee points out, it only takes a simple majority to change the rule. But with support for capital-gains taxes widely seen as a proxy for supporting an income tax, there won’t be a rule change. Consider it a zombie proposal — a dead plan walking.

In these early days, state politics is seldom about the art of the possible. It’s about positioning. Soon, hopefully very soon, pragmatism will settle in. When it does, the walking dead will return to the tomb.

Richard S. Davis’ column appears occasionally on the editorial pages of The Times. He is the president of the Simeon Partnership, a public affairs and communications firm. Email:

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