We’re guessing state officials are pretty lousy at carnival games, like the one where you estimate how many gumballs are in a giant jar. That is, at least, if their projections for a new capital gains tax are any indication.
Now, as the state finds itself with an unexpected bounty and a grossly inaccurate estimate, it is essential that the funds go toward the intended purpose. Schools should remain the focus of the revenue, with an emphasis on special education.
In 2021, lawmakers approved a 7 percent tax on profits exceeding $250,000 for the sale of stocks, bonds and certain other assets. The capital gains tax faced legal challenges, but this year the state Supreme Court ruled that it is an excise tax rather than an income tax, allowing it to go forward.
In April, the Legislature passed a budget that, based on earlier projections, included $248 million in revenue from the capital gains tax for the 2023 fiscal year, which ends July 1. But by May 9, the revenue department had collected $849 million.
Because the capital gains tax depends on the stock market and how the investments of taxpayers perform from year to year, it can be an unpredictable source of revenue. But it is fair to say that preliminary projections were off the mark.
The question is, what now?
Under the legislation establishing the tax, the first $500 million collected each year goes into the Education Legacy Trust Account, which can only be spent on public schools. Any excess goes to the state’s construction budget, specifically for school projects.
State Sen. Mark Mullet, D-Issaquah, the Senate leader on the construction budget, told The Seattle Times that he would prioritize funding for schools in areas with lower property values. Those districts often have difficulty passing levies for school operations and bonds for school construction.
“I think the focus will be how those dollars can help support those districts with lower property valuations,” Mullet said, “and we’re going to wait to see as the revenues come in. But if that ends up being real money, we can invest in the ’24 session.”
Inequities from district to district are well-documented for Washington’s public schools. The Legislature took steps to rectify that in recent years, increasing state funding and reducing reliance on local levies for basic school funding. But clear differences between wealthy districts and poor districts remain. That is inevitable to a certain extent, but inevitability should not prevent efforts to close the gaps.
Mullet proposes a levy equalization program. Districts that have difficulty getting voters to approve tax measures would be able to seek approval at a level lower than needed. A special fund created by the state would then make up the difference.
There also is room for bolstering the Small District and Tribal Compact Schools Modernization program and for assisting districts that have low property tax bases but are too large to qualify as a “small” district.
Most important, lawmakers should send a clear signal that the capital gains tax will be used for its stated purpose. There will be powerful temptation to use an unexpected windfall for other needs; there is no shortage of pressing issues facing the state government. But using the funds for anything other than schools would be fiscally irresponsible.
For one thing, the capital gains tax was passed explicitly to enhance school funding. For another, a large revenue stream one year does not mean the funds will keep flowing in the future. After all, state officials are not particularly adept at predicting these things.