More on the likelihood that Washington’s capital gains tax is unconstitutional.

Jason Mercier, with the Washington Policy Center, has posted his interview with University of Washington tax law professor Scott Schumacher on the constitutionality of Washington’s capital gains tax. Previously we wrote about and embedded Schumacher’s three-minute video on the controversial tax, in which he stated that he believes the tax is unconstitutional. In his interview with Mercier, he expands on the reasons.

In your opinion, is a capital gains tax an excise tax or an income tax? 

Professor Schumacher: “A capital gains tax is a tax on income. The federal tax laws define the term ‘income’ to include ‘gains derived from dealings in property,’ which includes capital gains. Notably, the new Washington State tax determines the amount to be taxed from the federal net long-term capital gains reported by the taxpayer. Thus, the Washington Capital Gains Tax takes an amount that is subject to income tax at the federal level and imposes an additional amount of tax on that income.” 

And,

Are there any constitutional restrictions in Washington state on the type of capital gains tax the legislature adopted?

Professor Schumacher: “If the capital gains tax is an income tax (and I think it is), then it would be unconstitutional under the Washington Constitution. The Constitution provides that all taxes on property must be uniformly applied and cannot exceed an annual rate of 1%. Here, the capital gains tax does not apply to everyone (and therefore is not ‘uniformly applied’) and the rate is 7%.”

Here’s a wrinkle we’ve not heard discussed.

Assuming a capital gains tax is an excise tax, are there any federal constitutional problems with the new Washington tax?

Professor Schumacher: “Yes. Under the U.S. Constitution’s Commerce Clause and recent U.S. Supreme Court precedent, a State tax must (1) only apply to an activity with a ‘substantial nexus’ with the taxing State, (2) be ‘fairly apportioned,’ (3) not discriminate against interstate commerce, and (4) be fairly related to the services the State provides. The first test is the key here. The Washington Capital Gains Tax applies to the capital gains of Washington residents, regardless of where the property was located. Thus, the tax could and would apply to an activity with absolutely no nexus or connection to Washington State, let alone a ‘substantial nexus.’ It is therefore unconstitutional.”

Interesting. The legal challenge to the tax is going forward in Douglas County court. 

Greg Jayne, the opinion editor at The Columbian,  wrote yesterday about the tax and its constitutionality. He thinks the tax is “the right thing to do.” We disagree. But we do agree with the last line of his conclusion:

But in considering a state capital gains tax, it seems there are two separate questions. One is whether it is constitutional, a reasonable and important question. But the other is whether it is the right thing to do. And when we reach a point in this country where money is not contingent on working, where wealth begets wealth and class divisions become self-perpetuating rather than the result of a meritocracy, a capital gains tax is, indeed, the right thing to do.

Getting there, however, is likely to require a change to the constitution rather than wishful thinking from the Legislature.

So far, voters have rejected six proposed constitutional amendments to allow an income tax. That may explain why legislative proponents of the capital gains tax opted to embrace wishful thinking.
 

Latest state revenue collections report shows cumulative collections beating forecast by 2.6%.

State tax collections continue to roll in above expectations, according to the most recent report from the Economic and Revenue Forecast Council. Here’s the bulleted summary:

  • U.S. employment increased by 235,000 jobs in August; the unemployment rate decreased to 5.2%.

  • U.S. consumer confidence declined in August.

  • For the 12 months ending August 2021, consumer prices increased by 5.2% (SA).

  • Washington employment is now 125,400 (3.6%) lower than at its February 2020 peak.

  • Seattle-area consumer price inflation matched the national average.

  • Major General Fund-State (GF-S) revenue collections for the August 11, 2020 – September 10, 2021 collection period came in $72.3 million (3.7%) higher than forecasted in June.

  • Cumulatively, collections are now $162.0 million (2.6%) higher than forecasted.

This suggests that when the ERFC meets to update the June forecast later this week, there will be another upward adjustment. The Washington Research Council has more here.

 

State reports 6.6% drop in weekly initial unemployment claims.

As we mentioned earlier, weekly fluctuations in unemployment claims are to be expected. We’re nonetheless encouraged by the 6.6% drop in initial claims reported today by the state Employment Security Department.

During the week of Sept. 5, there were 4,860 initial regular unemployment claims, down 6.6 percent from the prior week. Total claims filed by Washingtonians for all unemployment benefit categories numbered 245,345, down 4.8 percent from the prior week.  

  • Initial regular claims applications are 74 percent below weekly new claims applications for the same period last year during the pandemic.
  • The 4-week moving average for regular initial claims was 5,124, a decrease of 167 from the previous week’s 4-week moving average. During the same time in 2019, it was 5,012.
  • Decreases in layoffs in construction and health care & social assistance contributed to a decrease of 345 regular initial claims over the previous week.
  • There was a decrease in the combined total of initial claims and continued or ongoing claims for all benefits—which include regular unemployment insurance, Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC).
  • Federal pandemic benefits programs, including PUA and PEUC as well as the additional $300 per week, expired the week ending Sept. 4, 2021.

In The Seattle Times, Paul Roberts reports,

New unemployment claims in Washington fell last week even as the summer’s hiring surge appeared to be tapering….

In Washington, the job market appeared to be cooling slightly after two months of strong hiring.

In August, the state added 16,800 jobs, compared to 24,300 jobs in July and 25,600 in June, the Employment Security Department reported Wednesday. The slowdown in August came as Washington saw a sharp increase in COVID-19 cases.

And, of course, this.

Since March 2020, nearly 1.2 million Washingtonians have received more than $21.3 billion in jobless benefits, with about three-quarters of the money coming from the federal government.

By comparison, in each of the previous 10 years, the Employment Security Department’s annual payout averaged just more than $1 billion, according to the department.

With the expiration of federal pandemic programs, however, total weekly benefit payments will fall substantially.

Yes.

Economic recovery appears to stumble as unemployment claims rise nationally even as labor shortage persists.

An increase in unemployment claims last week may not be a big deal – some fluctuation should be expected – but, then again, concerns are rising as we move deeper into fall. The Department of Labor reports the uptick and the still-low four-week average.

In the week ending September 11, the advance figure for seasonally adjusted initial claims was 332,000, an increase of 20,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 310,000 to 312,000. The 4-week moving average was 335,750, a decrease of 4,250 from the previous week’s revised average. This is the lowest level for this average since March 14, 2020 when it was 225,500. The previous week’s average was revised up by 500 from 339,500 to 340,000.

The Associated Press report, however, notes the concerns.

Last week’s increase was small and may be temporary. The four-week average of jobless claims, which smooths out fluctuations in the weekly data, dropped for the fifth straight week to just below 336,000. That figure is also the lowest since the pandemic began…

The job market and the broader economy have been slowed in recent weeks by the delta variant, which has discouraged many Americans from traveling, staying in hotels and eating out. Earlier this month, the government reported that employers added just 235,000 jobs in August after having added roughly a million people in both June and July.

Hiring in August plummeted in industries that require face-to-face contact with the public, notably restaurants, hotels and retailers.

There’s the delta variant, of course, but also elevated worries associated with the labor shortage. Also from the AP,

The gulf between record job openings and a lack of people taking those jobs is forcing Wall Street to reassess the pace of the economic recovery.

Jobs were gutted during the pandemic and employment growth has been a closely watched gauge for investors. Increasing employment eventually results in increased consumer spending, which is the biggest driver of economic growth. Without the former, analysts have said, it will take longer than expected for the economy to operate at some semblance of a pre-pandemic normal.

“That time horizon keeps getting extended,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

With job openings at a record high, a number of factors seem to be keeping prospective employees sidelined: Covid fears, child care, and skills mismatches among them.

“The developments in the labor market are among the more important in the world today,” Mayfield said, in a note to investors. “A lagging recovery will keep the Federal Reserve on the sidelines, but also limit economic growth.”

And, although the recent CPI numbers were better than expected, particularly after the jump last week in the producer price index, inflation still poses a further recovery risk. See, for example, this discussion from the Oregon Office of Economic Analysis.

We’re far from out of the woods, yet.

Most state pension systems, including Washington’s, are in the best position they’ve been in since the Great Recession.

The Associated Press reports on a new study from Pew with good news about state pension plans.

Pension systems for state government workers across the U.S. are in their best shape since the Great Recession began more than a dozen years ago, according to a study released Tuesday.

The Pew Charitable Trust report credits a booming stock market over the past year as well as states’ longer-term steps, which include boosting taxpayer contributions to public pension funds and reducing promised retirement benefits, particularly to newly hired workers.

“The better decisions, the fiscal discipline, is something that states can keep doing next year and the year after,” said Pew’s David Draine, one of the report’s authors. “You can’t hope for once-in-a generation returns to occur again.”

Taxpayers care.

The health of public pension systems resonates beyond government employees. When the systems are poorly funded, state and local governments have to consider raises taxes or cutting basic government services to pay retirees’ pensions.

These maps from the Pew report shows the improvement.

There’s a lot of detail in the report. Notice that Washington is one of the states showing improved funding. Here’s the crux:

According to projections by The Pew Charitable Trusts, the gap between the cost of pension benefits that states have promised their workers and what they have set aside to pay for them dropped in 2021 to its lowest level in more than a decade. Pew estimates that state retirement systems are now over 80% funded for the first time since 2008.

Such progress would be significant in any year, but the improvement in fiscal 2021 occurred during a recession in which many analysts predicted that revenue losses related to the COVID-19 pandemic would increase retirement fund shortfalls. Instead, Pew found an increase in assets of over half a trillion dollars in state retirement plans, fueled by market investment returns of more than 25 percent in fiscal 2021 (the highest annual returns for public funds in over 30 years) and substantial increases in contributions from taxpayers and public employees to pension funds.

These contribution increases, which came after years of states shortchanging their systems, are part of an upward trend over the past 10 years. Pew research shows that contributions have increased an average of 8% each year over the past decade, boosting assets and paying down debt. In the four states with the most financially troubled pension systems—Illinois, Kentucky, Pennsylvania, and New Jersey—contributions increased by an average of 16% a year over the same period.

Nearly every state has also enacted benefit reforms to lower costs, including cutting benefits for newly hired public workers. Officials in many states have also become more disciplined about managing pension finances, using tools such as stress testing to determine how twists and turns in the economy might affect pension funds.

As a result, Pew found that for the first time this century, states are expected to have collectively met the minimum pension contribution standard.1 This means that even before the market rally during the pandemic, payments into state pension funds were sufficient to cover current benefits and reduce pension debt, a milestone called positive amortization.

Progress.

Column: Remote work presents opportunities for rural communities.

AWB president Kris Johnson writes that ability to work remotely can be a boon to rural communities.

One bright spot amid this ongoing pandemic is the growing role that remote work is playing in the economy, and the opportunities it’s creating for employees and communities, particularly in rural parts of the state.

When the pandemic began and large portions of the economy went into lockdown, we discovered very clearly that not all work must be done from an office. Some work can be done just as well remotely with a good broadband connection and some essential skills.

To help ensure residents in rural Washington are equipped with those skills, the AWB Institute and WSU Extension have launched the Washington Rural Initiative. The initiative, with support from companies like Avista and STCU, is modeled after a successful program in Utah called the Master Remote Work Professional Certification.

He goes into more detail in the column, which we recommend. Washington is well-positioned.

Washington’s rural population grew 9.4% from 2010 to 2020, according to recently released Census data. That’s less than the 14.7% growth in Washington’s urban areas, but a significant contrast with a national decline of 0.5% in rural population.

Rural Washington is growing already. Expanding remote work will help fuel continued growth and ensure increased prosperity in these communities.

Right.

Monthly employment report: Washington added 16,800 jobs in August.

The state Employment Security Department reports today that nearly 17,000 jobs were added last month.

Washington’s economy added 16,800 jobs in August and the state’s preliminary seasonally adjusted monthly unemployment rate remained constant at 5.1 percent from July to August, according to the Employment Security Department (ESD).

While off the pace set in June and July, 25,600 and 24,300 respectively, it’s still good growth.

“August’s job gain numbers were reasonably solid in the face of renewed health concerns,” said Paul Turek, economist for the department. “But the uncertainty around the Delta variant is likely to result in an uneven labor market recovery.”

Ah, yes, again, that uncertainty clouds all forecasts.

More in the report. 

Preliminary state economic forecast anticipates improved employment and income performance.

The Economic and Revenue Forecast Council has released its preliminary economic forecast. This release is ahead of the new revenue forecast coming out later this month. The state economy continues to recover. Note well: Employment is down 4.1% from the pre-pandemic peak.

Some highlights.

We have two months of new Washington employment data since the June forecast was released. Total nonfarm payroll employment increased 48,800 in June and July which was 900 more than the increase of 48,000 expected in the forecast. Washington employment is now 143,000 (4.1%) lower than at its February 2020 peak. Private services-providing sectors added 40,800 jobs in June and July. The manufacturing sector added 900 jobs despite the loss of 500 jobs in aerospace manufacturing. Construction employment increased by 2,000 jobs. State and local government employment increased by 5,000 jobs in the two-month period and federal government employment increased by 100 jobs.

And,

Washington’s unemployment declined to 5.1% in July from 5.2% in June. The unemployment rate is down significantly from the 16.3% rate reached in April 2020 which was an all-time high in the series that dates back to 1976. At the business cycle peak in February 2020 the Washington unemployment rate was 4.1%.

In sum, some improvement from how things looked in June.

We expect a 2.4% increase in Washington employment this year which is up from the 2.0% increase in the June forecast. We expect above-average growth through the remainder of the forecast as the economy continues to recover from the recession. We expect employment growth to average 2.3% per year in 2022 through 2025 which is the same rate expected in the June forecast. Our forecast for nominal personal income growth this year is 6.4%, up from 6.0% in the June forecast. Personal income growth will slow next year as the extraordinary stimulus of the last two years is withdrawn. We expect personal income growth of only 1.7% in 2022 compared to 1.5% in the June forecast. Our new forecast for nominal personal income growth in 2023 through 2025 averages 5.3% per year compared to the 4.8% rate in the June forecast.

So far, it looks like a possible uptick in the revenue forecast. But we typically avoid speculation.