FILE – Washington state capitol building

The front of the Washington state capitol building in Olympia, Washington.

(The Center Square) — A proposal to tax Washington's wealthiest residents is splitting hairs along party lines in the legislature where lawmakers disagree on how to cover the costs of helping struggling parents in the pandemic. 

Support for a capital gains tax has been largely championed among Washington Democrats who see it as a solution to the state's regressive sales taxes and as a way of paying for expanded social services.

Sponsored by state Rep. Tana Senn, D-Mercer Island, House Bill 1496 joins a handful of other tax bills this year aimed at making affluent Washingtonians spread their wealth around.

Starting in 2022, HB 1496 would slap a 7% tax on capital gains from property sales including real estate in excess of $200,000 and $400,000 for joint filers. A 9.9% tax would apply to the sale of other long-term assets including corporate stocks and bonds.

By comparison, the federal capital gains tax brackets in 2019 ranged from 15% to 28% on property sales from homes, cars, stocks, and bonds.

Through 2025, all revenue would be split 50/50 between the state general fund and the Fair Start for Kids account covering child care copays. Past 2025, revenue would be split 60/40 between the general fund and the child care account.

Adopting a capital gains tax would put Washington in line with 41 other state tax codes, but conservatives say a capital gains tax would be vulnerable to the kind of market volatility induced by the COVID-19 pandemic in 2020.

“What happens when we see a downturn in the economy?” said state Rep. Drew Stokesbary, R-Auburn. “What happens to the funding that we both agree is badly needed when the revenue generated by capital gains tax can’t keep up with the demands that have been placed on that account?”

A variety of studies have shown the stock market's century-long gains have largely outpaced temporary downturns and capital gains tax supporters have hailed its record highs over the past year as evidence of its sustainability.

Senn, whose district encompasses some of Washington's wealthiest households, said on Thursday the proposed capital gains tax would ideally cover losses to the Fair Start account with money from the general fund if need be.

"Investments in child care make sense and we can do it by extending a bit of equity to our tax code as well," Senn said. "For those with sizable investment portfolios, they’ve witnessed the greatest period of wealth creation in the country’s history and the wealth of our most privileged on longer tracks with the mainstream economy.”

HB 1496's listed exemptions include retirement accounts, timber from real estate investment trusts, sales of primary residences for less than $5 million, and the sale of livestock held for more than a year.

Jack Field, a lobbyist with the Washington Cattle Feeders Association, testified in opposition to the bill on Thursday on the grounds it could hurt ranchers who can raise cattle to market weight in under a year's time.

No one testifying on HB 1496 on Thursday disagreed that child care is becoming harder for working parents to afford in the pandemic.

In 2019, about one out of two Washingtonians were struggling to afford or find child care, according to the state Department of Commerce, and nearly one out of 10 were fired or let go due to child care issues.

Statewide, struggles with child care came at the cost of $2 billion to employers in workplace turnover and missed work in 2019, the agency reported.

“If we’re going to recover from this pandemic, we can’t continue to take from those that have been impacted the most,” said Megan Pirie of Spokane, a single mother of five and a recovery support navigator. “We can’t recover on the backs of our most impacted community members.”

Of the 70 people signed in to testify on Thursday, most voiced strong support, especially child care centers that continue to see low enrollment and sanitation costs in the pandemic.

Still, others like Beth Broadway, a teacher and chair of the state’s 37th District Republicans, assume declining capital gains tax revenue would incentivize the state to pick taxpayers’ pockets by other means.

“Once people stop getting their capital gains because the stock market goes down or maybe because those people will move out of the state, and you decide you need income for this child care, what are you going to do?” Broadway said. “You’re going to find another way to find an income tax on people like me that are poor.” 

Generally, income taxes have proven more volatile than sales taxes, as seen in the years following the Great Recession of 2008.

Data from the Tax Foundation shows in 2010, sales taxes were down 8% from their 2008 peak compared to personal income tax revenue which plunged by 16% and corporate income tax revenue which fell by 25%.

Studies like those from Pew Charitable Trusts show sales tax revenue often need longer recoveries. While most states which depended on a mix of sales, income, and capital gains taxes saw their pre-recession tax revenue shoot back up by 2013, Washington saw the same recovery nearly two years later in 2015.

Like the capital gains tax sitting in the Senate this session, HB 1496 faces an uphill battle to become law based on decades of court precedent against state income taxes which legal scholars and free market advocates have likened similar efforts to in past years.

By Thursday afternoon, HB 1496 had picked up 28 Democratic sponsors, or more than half the votes needed to pass the Democrat-controlled House. It awaits further action by the House Finance committee.

Staff Reporter

Tim Gruver is a politics and public policy reporter. He is a University of Washington alum and the recipient of the 2017 Pioneer News Award for Reporting. His work has appeared in Politico, the Kitsap Daily News, and the Northwest Asian Weekly.