Op-ed on capital gains tax: Tax policy influences decisions. Also, confirmation from Spain.

As the lawsuit challenging the constitutionality of the state’s new capital gains tax moves forward, slowly, there’s more evidence that the new tax is already influencing decisions. We’ve written before that the arguments against the tax’s legality appear compelling; that the tax is not necessary to balance the budget, even with its dramatic spending increases; and, cited editorial opposition to the tax, including one pointing out its adverse effect on agriculture, business owners, and others planning for retirement

The case is driven home on a more specific level in a Wenatchee World op-ed by two business owners.April Clayton, owner of Red Apple Orchard in Orondo and Collin Hathaway the owner of Guardian Roofing and CEO of the home service company Flint Group which owns South West Plumbing, describe how the tax effects their business planning. Clayton is a plaintiff in the challenge to the tax; Hathaway is president of the coalition leading the challenge. They write,

For small businesses like Guardian Roofing and Southwest plumbing on the western side of the state, the illegal tax has business owners questioning whether they should continue growing business in Washington state owners often take tremendous personal and financial risk building their companies with the hope that they will one day be able to sell or withdraw profits from their companies as reward for this work. For many of us, this state tax in conjunction with increased federal tax rates, makes this type of risk/return profile much, much riskier.

Case in point, the vastly increased tax rates are already impacting our plans to expand our plumbing business within Washington versus investing outside the state. It’s also affecting Red Apple Orchards decision on whether to expand existing orchards or sell the land entirely. Washington state loses in both cases.

Business plan for the future. The refrain most commonly heard when employers are asked what they want in tax policy is this: We want certainty. Close behind is the statement that they do not want to be placed at a competitive disadvantage. The capital gains tax has already caused businesses to adjust their planning.

Back to the op-ed, which gets to why a tax not needed to fund state government made it through the Legislature.

How does this impact all Washingtonians? This is the major foray by state legislators to introduce an income tax with the explicit intent to introduce broader income taxes on W2 income, residences, and retirement accounts. a sneaky attempt by state Democrats to introduce broader state income tax on all Washingtonians.

Seattle state Senator Jamie Pedersen and other legislators have been explicit about this. Pedersen said he hopes the courts reverse previous decisions rejecting income taxes in order to broaden it and open the door to a statewide income tax, including a tax on Washingtonian’s W2 hourly and salaried income.

A colleague recently shared an academic report with us, an analysis of the impact of a wealth tax in Spain, which demonstrates the power of tax policy to influence decisions. Here’s part of the abstract:

This paper analyzes the effect of wealth taxation on mobility and the consequences for tax revenue and wealth inequality. We exploit the unique decentralization of the Spanish wealth tax system in 2011—after which all regions levied positive tax rates except for Madrid—using linked administrative wealth and income tax records. We find that five years after the reform, the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions, while smaller tax differentials between other regions do not matter for mobility. (Emphasis added.)

Policy makers may disagree as to merits of the tax policies enacted. The economists who conducted the research in Spain would prefer that Madrid was not a “tax haven” and suggest a preference for a more centralized model that would take away its regional advantages. (It’s an argument not unlike the argument for fiscal federalism here, where progressive taxation at the national level is seen as preferable for redistribution of income, as it mitigates inter-state tax competition.)

But it’s impossible to sustain an argument that maintains tax policy does not influence locational decisions. It does. And, in the instance of the capital gains tax, that influence is likely to work against Washington’s economic vitality.