With the state Supreme Court on Friday upholding a capital gains tax in Washington, Democrats in the Legislature probably are feeling like the dog that finally caught the car. And all we can hope is that they know what they are doing.
Because a capital gains tax is such a seismic shift in Washington tax policy that it likely will have unintended consequences. And because Democrats have been seeking a capital gains tax for so long that they likely forgot why they wanted one in the first place. And because the temptation will be to gradually ramp up that tax.
Before we go any further, it should be mentioned that I personally think the tax is a good idea. As you probably noticed, Washington doesn’t have a state income tax. Not that people haven’t tried. During the Great Depression, voters overwhelmingly approved an income tax, but the state Supreme Court ruled that the tax violated the state constitution.
That lack of income tax leads to a heavy reliance on a sales tax and a gas tax to raise money for government functions. And that inordinately, um, taxes low-income residents. Washington’s tax system is often called the most regressive in the nation, and it seems that is not a good way to help people pull themselves up by the bootstraps.
You might agree or you might not. But for nearly a century, legislators have repeatedly tried to ignite the income tax bonfire and repeatedly have ended up with nothing more than singed eyebrows. Washington residents would rather lose a toe than approve an income tax.
Anyway, seeking a way to work around that, lawmakers in 2021 passed a capital gains tax. And on Friday, the Supreme Court ruled that it is an excise tax, not an income tax.
Tuh-may-toe, tuh-mah-toe, etc., they can call it what they want. But declaring that a capital gains tax is not an income tax requires some cognitive gymnastics.
Which brings us to the unintended consequences. As one reader told me a while back: “You bet that if the court upholds this dishonest, unconstitutional soak-the-rich tax we will give very serious consideration to leaving this community for a tax haven elsewhere. What a shame, to kill the geese that lay the golden eggs. And how unnecessary.”
The guess is that is a common sentiment among the people who will have to pay the tax. And the guess is that those people have plenty of employees and donate quite a bit to educational programs and public health and churches and arts societies and animal shelters — you know, things that enrich our community and, therefore, benefit all of us.
Gov. Jay Inslee, who long has supported a capital gains tax, doesn’t seem too worried about that. “For 134 years, Washington state has been waiting for the day when a fairer tax system came about, one where working people were not carrying an inequitable share of the burden,” he said. “Today is that day. Washington’s capital gains tax helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents.”
The flaw in that thinking is evident. We can argue about what constitutes a “fairer tax system” until the revenue comes home, and it would be a circular argument that lands us back where we started. Defining a “fair” tax system is like trying to explain quantum physics.
And despite all that “unfairness,” Washington has an economy that routinely is ranked by outside observers as one of the best in the nation. That might be in spite of our tax system, or it might be because of it. But for some reason or another, Washington long has been a hub of innovation and entrepreneurship, and tinkering with that seems risky.
Therein lies the problem with a capital gains tax. Will it make a difference for public education, as intended? Will those who pay it leave the state? We won’t truly be able to assess the fallout for several years.
In the meantime, we can hope that lawmakers know what they are doing.
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