House passes two-year spending plan; Washington Research Council publishes analysis of capital gains tax proposals

The state House of Representatives passed its 2017-2019 budget on a party-line vote. The Associated Press reports,

The spending plan passed the Democratic-controlled chamber on a 50-48 vote Friday. The chamber did not vote on the $3 billion in taxes they are seeking, including a new capital gains tax. Those bills will get a public hearing early next week.

We expect much more coverage of the House budget in the next few days.

One key to the $3 billion in revenues the AP story references is a proposed capital gains tax. With that in mind, the Washington Research Council’s new special report, Proposals for a State Capital Gains Tax, is timely and useful. The WRC writes,

Because their constitutionality is questionable, the capital gains taxes proposed by Gov. Inslee and the House Democratic Caucus are not good sources for such revenue, as they would be tied up in court for several years.

Adding a capital gains tax to the mix would make the state’s revenue stream more volatile. The additional volatility would surely increase fiscal stress on state government (and schools) in the next economic downturn.

Supporters of the proposed tax like it because they believe it targets the top “one percent” of income earners. However, some of the targeted parties will avoid the tax by moving away from the state. This geographic separation will make them less likely to invest here. Others will stay here but avoid the tax by not cashing in old investments to pursue new opportunities. Start-ups which rely on grants of stock or stock options will find the state less attractive. All of these responses will reduce the dynamism of the state economy.