More on Senate-passed capital gains tax and the state economy.

Washington’s COVID-19 recession is much different from the state’s experience a decade ago in the Great Recession, the Washington Research Council reports. And the differences are relevant in considering a new, controversial capital gains income tax. Emily Makings, WRC senior analyst, writes,

Some proponents of new taxes this year are arguing that Washington needs to have new revenue sources in place for when the federal relief funds run out. These arguments ignore the fact that this recession now appears to be quite different from the Great Recession:

  • In the Great Recession, state revenues actually declined by 5.5% from 2007–09 to 2009–11. Today, state revenues are expected to increase by 10.7% in 2019–21, 7.2% in 2021–23, and 6.1% in 2023–25.
  • In the Great Recession, state personal income declined by 4.3% in 2009. According to the preliminary March economic forecast from the Economic and Revenue Forecast Council, state personal income is expected to increase by 6.4% in 2020, by 3.9% in 2021, and by 0.1% in 2022. Then, from 2023 through 2025, personal income growth is expected to average 5.0% annually.

She reviews arguments made by proponents of the capital gains tax, primarily addressing claims that when the federal aid runs out, the state will again be hard-pressed to maintain budgeted spending, as was the case coming out of the last recession. Makings points out,

It’s true that stimulus funds during the Great Recession propped up state spending in 2007–09 and 2009–11, and that when federal funding was used up, the Legislature reduced spending in 2011–13. It is not obvious that that will happen now. Thanks to improving revenue forecasts, actions taken by the governor last year, and the federal funding received so far, Washington does not have a budget shortfall. Any additional federal funding can be spent on new costs related to the pandemic and recession—it is not needed to address ongoing budget shortfalls.

The tax is an unnecessary response to a nonexistent problem. 

Also on the tax, we noted in yesterday’s newsletter that the Senate stripped the emergency clause from the tax bill. Jason Mercier with the Washington Policy Center reports it may come back in the House.

Now there are whispers that the House may add the emergency clause back to the bill forcing the Senate to vote on it again. Would there still be 25 votes in support in the Senate if the voters are denied the opportunity to run a referendum?

It is because of this two-year delay in the collection of revenue from the new income tax that Sen. Hobbs said on the floor (1:43):

“I actually do believe there are times when you need emergency clause, but in this case Mr President, this act actually does not take effect for another two years. So really not an emergency.”

A majority of the Senate agreed and adopted this amendment from Sen. Hobbs:

“Removes the emergency clause. Removes language from the intent section specifying that the tax is necessary for the support of state government and its existing institutions.”

No emergency, for sure, but still more drama. See also this article in The Lens.