Capital gains tax alternative proposed

We’ve talked about how regressive Washington’s tax structure is and how people in higher income brackets contribute a smaller percentage of their money to funding public services.  One solution to this discrepancy was proposed by Representative Laurie Jenkins during the 2012 Legislative Session that would have helped to correct this imbalance. 

On February 29, 2012, Representative Jenkins, and 26 other Democrats, introduced House Bill 2563 - Establishing a state tax on capital gains – which would have applied a 5% tax on capital gains over $10,000 per year. For those of you who don’t know, capital gain is the profit from investing in capital assets (like stocks, bonds, or real estate), which exceeds the purchase price.  So if you buy a stock for $100, then sell it later for $150, you have a capital gain of $50.  It’s important to note that one of the exemptions for this tax removed any collection of capital gains from the sales of homes.  Also, the collection of this tax would mirror the federal model, which would make it easier for citizens during tax season.

It was projected that, if implemented, this bill would bring in over $1.4 billion during the 2013-15 fiscal biennium.  Also, 42 other states have a similar tax on capital gains, 31 of which are higher than the proposed 5% for Washington.  Representative Jenkins said,  “We should join 42 other states in making sure everyone pays their fair share for public schools and universities, prisons and parks. Capital gains is a big step toward tax reform and fairness.”  Lastly, according to the Washington State Budget and Policy Center, 96% of capital gains go to those with an annual income over $1 million.

This bill seems like a good way to even the tax burden in Washington. So, what happened? Two things killed the capital gains proposal. The first was time.  When this bill got it’s first hearing with the House Ways and Means Committee, it was day 52 of a 60-day legislative session and the cutoff for fiscal committee bills was two days earlier. This meant that Jenkins’ bill needed to be included in a proposed budget to survive, but this didn’t happen. The second thing that would have killed this proposal is Initiative 1053 and the supermajority requirement on the Legislature for any revenue increase.

It’s unfortunate that this bill fizzled in the legislature and with any luck it will progress further when lawmakers return to Olympia next year.  This was a good example of addressing our regressive structure without trying to implement an income tax.  It’s also a popular revenue source for a majority of states and the federal government.  If this concept is to survive the legislature or the initiative process, people will need to be more aware of the discrepancy in tax contributions for people with low and high levels of income. People who are better off enjoy capital gains without paying taxes at the state level. Others who are less fortunate shouldn’t have to give up a higher portion of their money to fund government.