Although the state budget now balances over four years when the rainy day reserves are used, lawmakers continue to consider tax increases in 2021. The Lens reports a capital gains tax will likely be introduced in the next legislative session.
If passed, the bill is expected to trigger a legal challenge that some tax reform advocates hope results in a State Supreme Court decision addressing the issue of whether income is property – a position that would have important implications for other future progressive revenue proposals.
Rep. Noel Frame (D-36) is a co-chair of the state Tax Structure Work Group, which is set to deliver a report to the legislature at the end of the month on possible changes to the state tax code. The newly appointed chair of the House Finance Committee, Frame has introduced legislation in prior sessions to enact a capital gains tax, though she told Lens who introduces the bill this year and in what chamber “is to be determined.”
Again, the increase is not necessary to sustain current spending.
Frame said any bill introduced this year would likely be limited in scope due to the anticipated lawsuit and would not address existing taxes. “It’s hard to do that before you know what the outcome’s going to be. My personal hope is it will pass the legal challenges.”
Washington Research Council senior analyst reports lawmakers are also considering changes in business taxes. The Tax Structure Work Group learned that replacing the B&O tax with a corporate income tax faces a nearly insurmountable obstacle: the rate would have to be prohibitively high.
Business and occupation (B&O) tax collections totaled $8.59 billion in 2017–19. DOR estimates that in order to collect the same amount if the B&O tax is replaced with a corporate income tax, the corporate income tax rate would have to be 15.8%. (Note that only C-corporations would be subject to the corporate income tax, not S-corporations, partnerships, sole proprietors, or non-profits. Also, the analysis is not dynamic, so it doesn’t consider whether companies would restructure in response to such a high rate.
The Tax Foundation reports the highest corporate income tax in the nation is 12% in Iowa.
Iowa levies the highest top statutory corporate tax rate at 12 percent, followed by New Jersey (10.5 percent), Pennsylvania (9.99 percent), and Minnesota (9.8 percent). Two other states (Alaska and Illinois) levy rates of 9 percent or higher.
If a personal income tax were implemented in addition to a corporate income tax, DOR estimates that a tax rate of 4.75% (for both personal and corporate income) would collect $24.82 billion in revenues, which would allow the state to eliminate the B&O tax and the state property tax and reduce the state sales tax rate to 3.5%.
Corporate income taxes are highly volatile, as are progressive personal income taxes.
In considering tax structure changes, lawmakers may also want to pay attention to a Washington Research Council finding that Washington’s taxes have performed well during the pandemic relative to other states.
The Tax Policy Center’s preliminary state tax data shows that, nationally, state tax revenues for the April through September period in 2020 were 5.3% below the same period in 2019.
According to their data, ten states’ tax revenue increased. Washington’s state tax revenues decreased by just 0.3% ($35 million). That’s the second lowest revenue decline; including the states with revenue growth, it’s the 12th best change in revenues.