State Revenue

Dysfunctional Tax System Fails to Meet Modern Needs

Andy Nicholas — 2012-04-23T17:12:06Z

Part four in a series on Washington’s long-term fiscal challenges.

Washington’s outdated tax system is starving our state of vital resources desperately needed to invest in what it takes to create jobs and build a strong economy.

The amount taken in from state taxes, measured as a share of our state economy, has been steadily falling for the past couple of decades. In fact, since 1995 there has been a 30 percent drop. Without changes in the tax system, this downward trend won’t subside.

The major reason behind this decline is that Washington’s tax structure has not kept up with the changes in the state’s economy. It was built for a different time. For example, increasingly, the wealthiest Washingtonians make their money from capital gains, which the state doesn’t tax. In addition, the state sales tax – Washington’s largest revenue source – doesn’t reflect the massive shift in consumer spending patterns. When the sales tax took effect in 1935, people spent more on things than services. Today it’s the other way around, but the sales tax isn’t applied to most services – many of which didn’t exist when the sales tax began.

Elimination of the motor vehicle excise tax (MVET) through approval of Initiative 695 in 1999 made the decline even worse. Replacing the MVET with a flat, $30 vehicle licensing fee costs the state more than $800 million in annual resources.

In an era of so much social and economic upheaval maybe it’s natural to gravitate toward things that are traditional and familiar. But Washington’s 1930s-era tax system is making things worse. Difficult as it may be, we must acknowledge that Washington faces 21st century economic challenges that our quaint tax system simply can’t handle.

We can create a sustainable tax system that meets the demands of the 21st century global economy. Key reforms that would put Washington on the right path include modernizing the sales tax to include more consumer services and adopting a tax on rapidly-growing capital gains. These two options would help reverse the downward spiral of economic resources. In the coming year, adopting these changes would increase available state tax revenues by at least $800 million -- all of which could be invested health care, education, and other necessities proven to create jobs and promote prosperity.

Check out parts one, two, and three of this series for more information on Washington’s long-term fiscal challenges.

New National Report Highlights Weaknesses of Washington’s Tax Break Evaluations

Andy Nicholas — 2012-04-13T19:24:02Z

Washington gets a mixed assessment for its process of evaluating special tax breaks according to a new report from the nonpartisan Pew Center on the States.

The Pew study found that overall Washington ranks among the 13 states that are “leading the way” on tax break evaluations. Washington’s evaluation process was praised for evaluating the majority of state tax preferences over a 10 year period. However, our state received lower scores for the quality of its tax break audits.

Tax break evaluations don’t answer key economic questions

The report finds that effective audits should evaluate how tax breaks impact a state’s economy and the extent to which they create jobs. Many of the audits in Washington don’t provide such an assessment, which is why Pew gave Washington a lower score in this area. It’s important to note that answering these questions isn’t easy. As the study states:

“A core problem vexing states is that it is difficult to determine what would have happened but for the tax incentives. In some cases, they might cause companies to create jobs or increase investment, but they might just be offering public dollars to reward businesses for what they would have done anyway.”

Even so, other states have found ways to tackle the “but for” question. Oregon received high marks for both the scope and quality of its tax break evaluations. The study cited creative approaches taken by that state to assess the economic and jobs impact of several large state tax breaks.

Sunset dates necessary for transparency

Oregon was also praised for applying systematic expiration or “sunset” dates to most state tax credits. Sunset dates are important because they force state policymakers to balance the costs and benefits of state tax breaks against competing public health and education priorities on a routine basis -- an area where Washington needs improvement.

While audits provide useful information regarding the performance of tax breaks, policymakers in Washington state are not required to act on that information. As Bill Longbrake, Chair of Washington’s Citizen Commission for Performance Measurement of Tax Preferences, states in the report:

“It is a great process in terms of depoliticizing it, it is a great process in terms of providing really high-quality analysis and information, it is a great process in terms of involving public stakeholders and getting their views on the table, but it stops at that point […] There is nothing that requires the legislature to do anything other than receive the report and hold one hearing on it.”

As we’ve argued previously, applying sunset dates to most tax breaks in Washington would push lawmakers to act on the findings of state auditors.

The report, co-authored by Jeff Chapman, the Budget & Policy Center’s former Research Director, shows that Washington has made great strides in recent years toward better evaluation of tax breaks, but more needs to be done. Going forward, policymakers should apply routine sunset dates to most tax preferences and should give auditors the tools they need to provide more comprehensive assessments.

For more information read the entire Pew report.

Also check out our policy brief, “Every Dollar Counts: Why it’s Time for Tax Expenditure Reform.”

Tax Increases? Where?

Andy Nicholas — 2012-04-12T21:42:20Z

Yesterday’s state budget agreement might have left some with the impression that lawmakers eliminated scores of tax breaks, raising millions upon millions of dollars to preserve public health and education priorities. That simply isn’t the case.

All told, tax increases resolved only $250,000 of the more than $6 billion in revenue shortfalls encountered since the current budget took effect in July 2011, even taking account of what the Legislature did yesterday. During the same period, public investments in schools, health care, transportation, and other things that promote job growth and economic prosperity have suffered some $5 billion in harmful cuts (see graph below). (1) This lopsided approach has only worsened Washington’s long-term economic challenges.

Wait, didn’t policymakers just curtail a wasteful tax break for out-of-state banks? Yes they did. Limiting eligibility for that break to small banks (those that operate in fewer than 10 states) will generate about $14.5 million in the fiscal year that begins this July. They also closed a tax loophole for businesses that sell roll-your-own cigarettes, which will raise about $12 million.

Yet, since January 2011 lawmakers have also created or extended a number of other tax breaks for specific industries – ranging from fruit and vegetable processors ($6.7 million per year) to real estate firms ($1 million per year) to movie production companies ($3.5 million per year). They also established a permanent tax break for newspapers worth about $7,000 per year.

When all of the tax giveaways enacted since early 2011 are accounted for, net tax increases raised less than a quarter of a million dollars for the current budget, leaving important economic investments without desperately needed funding. In fact, if you drew a line to represent the proportion of new revenue over that period, it would be one inch long. A line representing spending cuts would stretch the length of five-and-a-half football fields.

To build a state that can compete in the 21st century economy, policymakers must support first-rate schools, affordable colleges and universities, and a healthy, productive workforce. Doing so will require us to generate new resources by eliminating wasteful tax breaks, modernizing our sales tax by including more consumer services and enacting a new tax capital gains.

1. Net tax increases resolved only $250,000 of about $6.3 billion in budget shortfalls encountered since the start of the 2011-13 fiscal biennium. Going forward, total tax actions enacted since early 2011 will result in a net annual increase of about $3.5 million.

Supplemental Budget: Worst of Cuts Avoided, Challenges Remain

Kim Justice — 2012-04-11T22:40:44Z

The Legislature concluded its second special session by passing a budget that spares kids and vulnerable populations from deeper cuts, but takes no steps to rebuild our economy.

Since 2009, the Legislature has cut over $10.5 billion from investments in health care, education, and resources people need to remain economically secure through a recession (see graph). This is the opposite of what is necessary for our economy to recover. While the worst of the cuts to these investments were avoided this time around, little progress was made to ensure future economic prosperity.

Actions taken by the Legislature at the close of special session include:

Spending cuts:

$295 million in cuts: Almost half ($127 million) of the reductions came from unspent funds in the Temporary Assistance to Needy Families program, which provides families with child care support and help finding a job. This funding could have been used to help families hardest hit by the recession, but instead it was mostly used to balance the budget.
Funding preserved: K-12 and higher education, support for people with disabilities, women’s health, and food assistance were spared further cuts.

$238 million shift in payments to local governments:

By waiting until the end of each month to distribute tax revenues to local jurisdictions, the state budget gets a one-time $238 million boost.

Miniscule revenue increases:

Actual tax increases amounted to about $26 million, from closing a tax breaks for out-of-state banks and sellers of roll-your-own cigarettes.
Policymakers also cut taxes by about $20 million. Tax breaks were renewed or extended for companies that process fruits and vegetables, server farmers, film companies, and shipping businesses.
Administrative actions -- such as selling the state’s liquor distribution center and offering an amnesty program for taxes owed on personal property – amounted to about $27 million in additional resources.

Change to four-year budgeting:

Requiring the Legislature to budget four years out could result in even deeper cuts to public priorities in the future because it fails to address the major reasons why Washington has a hard time meeting growing public needs: spending and revenue are not treated the same in budget decisions, and examining tax breaks is not part of the budget process. Click here to read more on this topic.

The Legislature missed out on the opportunity to enact smart reforms that would help create jobs and put the state on track to compete in the economy.. Key reforms include: extending the sales tax to more consumer services, enacting a tax on capital gains, and systematically reviewing the billions of dollars spent each year on special tax breaks.

Four-Year Budgeting: Unreliable Long-Term Forecasts Could Harm Public Priorities

Andy Nicholas — 2012-04-09T21:50:05Z

Part Three in a Series on Washington's Long-Term Fiscal Challenges

Without the ability to address Washington’s flawed revenue system, current proposals requiring the budget to be balanced over four years (instead of the current two year cycle) would force policymakers to cut important public health and education priorities over the long term. A major reason is that long-term revenue forecasts tend to be highly unreliable.

As we noted in parts one and two of this series, balanced state budgets are key to maintaining important priorities in the long run. However, economic uncertainty makes it extremely difficult for forecasters to develop reliable long-term revenue estimates.

The graph below shows that forecasters tend to be overly conservative when estimating revenue growth following a recession and overly optimistic during an economic peak. Following the “dot-com bust” recession of the early 2000s, the state Economic and Revenue Forecast Council (ERFC) under-estimated state tax collections by about $2.8 billion prior to the 2005-07 budget cycle.

Under current budgeting practices, it is entirely appropriate for the ERFC to be extremely cautious when projecting state revenues following a recession. However, under the proposed four-year balanced budget requirements this approach could harm public investments by creating a “ratchet effect.”

That means overly pessimistic forecasts would require policymakers to enact unnecessarily deep cuts to public health and education infrastructure in order to keep the budget balanced within the depressed revenue estimates. And, deeper-than-necessary cuts to these and other vital components of the state economy would greatly harm the state’s ability to recover following a recession.

The “ratchet effect” would be less severe if the legislature were able to raise additional revenues, which would increase the revenue forecast and mitigate the need for excessive cuts. Yet the onerous, minority rule requirement established under I-1053 makes it virtually impossible for the legislature to meaningfully increase revenues under current law.

Without the ability to address Washington’s flawed revenue system, proposals to mandate a four-year balanced budget would simply force policymakers to abandon our commitments to building a robust and vibrant state economy.

This is the third post in a series on Washington’s long-term fiscal challenges. Be sure to check out parts one and two. More to come.

New Revenue Bill: A Step in the Right Direction, Far from Balanced Approach

Tara Lee — 2012-04-06T19:56:11Z

A new bill in the state Senate (SB 6635) would generate additional resources to help address the roughly $1 billion revenue shortfall. While this is a positive development, the amount of additional revenue under consideration falls far short of what is needed to sustain basic public investments.

Senate Bill 6635 would narrow two costly tax breaks – a business tax deduction for out-of-state banks and a sales tax exemption on certain telephone services – while extending tax preferences for other industries. No fiscal note has yet been produced, but a rough analysis suggests the measure would generate $40 million to $50 million in additional tax resources in the coming 2013 fiscal year. (In comparison, the current House budget proposal would cut roughly $315 million from Washington’s core health and economic services).

SB 6635 would:

•    Narrow a business tax break for out-of-state banks: Under current law, banks are allowed to deduct interest payments they receive from 1st home mortgages from their state Business and Occupation (B&O) taxes. The bill would limit eligibility for this deduction to banks that operate in fewer than 10 states.
•    Eliminate a sales tax exemption on certain phone services: Payphones, local residential calls, and calls from cell phones made by out-of-state residents are currently exempt from the sales tax. SB 6635 would repeal this exemption.
•    Extend a B&O exemption for fruit, vegetable, seafood processors: A B&O exemption for companies that process fruits, vegetables, and seafood products is currently set to expire on July 1st of this year. These businesses will then be eligible to receive a preferential B&O tax rate of 0.138 percent. The bill would extend the exemption through July of 2017.
•    Enact larger B&O tax breaks for newspapers: SB 6635 would provide a preferential B&O rate of 0.365 percent for newspapers. That rate would fall to 0.35 percent after July 1, 2013. Under current law, different B&O rates are applied to various activities related to newspaper publishing. The activity of printing a newspaper currently receives a preferential rate of 0.2904 percent while publishing a newspaper online is taxed at the ordinary rate for service businesses of 1.8 percent. The bill would consolidate these activities into single new category taxed at 0.365 percent, which would then fall to 0.35 percent at the end of the 2013 fiscal year.
•    Codify an exemption for shipping and cargo companies: Historically, the state Department of Revenue (DOR) has not collected Leasehold Excise Taxes (LET) from companies that lease publicly-owned cranes and docking facilities to unload cargo. After reviewing this activity, however, the Department recently announced these activities are subject to the LET. SB 6635 would create a LET exemption for these companies.

SB 6635 is a good first step in addressing our flawed revenue structure through closing tax breaks and loopholes. However, with proposed deep cuts to essential public services such as healthcare and economic services, now is not the time to extend and enlarge other tax preferences.

Out-Dated, Flawed Revenue System Creating Long-Term Fiscal Challenges

Andy Nicholas — 2012-04-02T19:32:12Z

Part Two in a Series on Washington's Long-Term Fiscal Challenges

Maintaining Washington’s core health and education investments requires that policymakers adhere to disciplined yet rational budgeting practices. As we wrote last week, it would be counterproductive to impose greater restrictions on the state budget process without giving policymakers access to all of the tools needed to create a sustainable budget – including the ability to address Washington’s flawed revenue system. Without changes to Washington’s outmoded tax system, the state will face years of increasingly dire fiscal challenges.

Regardless of how the current budget stalemate is resolved, Washington will face enormous fiscal problems in the years ahead. The graph below shows that under current law revenues are projected to fall $1.5 billion short of the amount needed to sustain our existing commitments to health care, education, services for the elderly, and other key public systems in the coming 2013-15 budget cycle. Absent major reforms, this gap – often referred to as the “structural deficit” – is projected to grow to $2 billion in the following 2015-17 cycle.

The largest cause of this ongoing fiscal imbalance is a revenue system designed for a 1930’s era economy. While our state economy has changed significantly over the past 80 years, the tax structure has not kept pace with these changes. As a result, Washington’s revenue system has lost significant capacity to generate the resources needed to support our state’s growing need for education, work force development, health care, and other basic economic priorities.

Key reforms that would alleviate this imbalance include: extending sales tax to consumer services, enacting a new tax on capital gains, and integrating spending on narrow tax breaks into the state budget process.

This is the second post in a series on Washington’s long-term fiscal challenges. Don’t change that dial.

Session Ends; 800 Pound Revenue Gorilla Still in Room

Andy Nicholas — 2012-03-09T21:01:40Z

The 2012 regular Legislative Session came to close last night, culminating in an unresolved debate over which budget proposal is more “sustainable." The truth is that neither the proposed House nor Senate budgets would adequately fund investments in education, health care, or other core public priorities – not now and not in the future.

Why? Because neither proposal addresses the single most important factor in building a truly sustainable state budget: fixing Washington’s flawed revenue system.

Washington’s excessive reliance on sales taxes means we have a tax system that simply cannot generate sufficient resources to maintain our existing commitments to a high-quality education system and safe, healthy communities. The graph below shows that our state sales tax has steadily lost capacity to generate tax revenues needed to support basic public services over the last 40 years.

This flawed system cannot be addressed with Initiative 1053 (I-1053) in place, however. I-1053 mandates that any tax increase can only be enacted via a supermajority (two-thirds) vote of the legislature or a vote of the people. The onerous supermajority requirement means that a minority of legislators can block action needed to preserve funding for essential public priorities.

The limitations of I-1053 were prominently revealed last night when House Bill 2791 failed to pass out of the House of Representatives, even though a majority (51) of legislators voted to approve it. The bill would have eliminated a sales tax break for nonresident shoppers in order to provide additional funds to implement all-day kindergarten in Washington.

Today, the King County Superior Court is holding a hearing on whether I-1053 violates the state Constitution. Whatever the Court decides, we will remain locked in an unsustainable cycle of slash and burn budgeting until we break free of Initiative 1053’s formula for minority rule.

The bottom line is that we cannot cut our way to a sustainable budget. More cuts to our health, education, and other public structures would result in more damage to fragile economic recovery and the well-being of Washingtonians. Creating a truly sustainable state budget requires reforming our failing revenue system.

Want to Reform State Government? Don't Forget the Tax Breaks.

Andy Nicholas — 2012-03-01T18:39:55Z

As legislators work towards a final budget for the 2012 Session, they should continue to explore reform of tax breaks - an area of state spending equivalent to billions of dollars per year.

The Legislature should seriously consider reforming how they balance this cost – from hundreds of exemptions, deductions, credits, and other tax preferences that are not routinely scrutinized during the budget process – against preserving funding for other important priorities like health care and education.

In the short run, eliminating wasteful or ineffective tax breaks could help policymakers address the ongoing economic crisis in a more balanced and thoughtful manner.

In the long term, heightened oversight of breaks could improve the overall adequacy, equity, and stability of our tax system. Most economists view tax expenditures as tax subsidies. As the graph below illustrates: ordinary taxpayers must pay higher tax rates to make up for those businesses and individuals that receive preferential tax treatment.

As this graph shows, without reducing revenues needed to support our vital public systems the state sales tax rate could be much lower, were it not for special tax preferences:

The current 6.5 percent sales tax rate could be lowered to 5.3 percent simply by eliminating the sales tax exemption on personal and professional services.
By further eliminating tax subsidies for businesses, the general sales tax rate could be lowered to 4.2 percent – fully 2.3 percentage points lower than the current rate.

While much of the discussion over the next week will focus on how lawmakers grapple with our immediate budget gap, it is imperative that the long-term adequacy and stability of our vital public systems also be considered. Accordingly, policies that would force the legislature to routinely consider how tax expenditures impact our ability to maintain important public priorities must be part of the conversation.

For more information on how we can create a more transparent and accountable state budget process by reforming tax expenditures, read the policy brief "Every Dollar Counts: Why It's Time For Tax Expenditure Reform."

*Analysis from this post was originally published December 2010.

Top 10 Graphs About Capital Gains

Andy Nicholas — 2012-02-29T03:41:17Z

Implementing a tax on capital gains, such as the one proposed in House Bill 2563, would be a bold way to promote job creation, long-term economic growth, and a prosperous future for all Washingtonians. Below is a ‘top ten’ list of graphs and tables highlighting why a tax on capital gains is a smart and effective way for Washington to strengthen its vital public health and education systems. (Click on graphs to enlarge.)

House Bill 2563 will be heard in the House Ways & Means committee this morning.

Drum roll please...

See: "Capital Gains Still More Concentrated Among Wealthiest Few"

See: "Capital Gains: A Rapidly Growing, Yet Untapped Resource"

See: "Elite Investment Clubs Account for Largest Share of Capital Gains"

See: "A Capital Reform"

See: "Accelerate Washington's Economy, Tax Capital Gains"

See: "A Capital Reform"

See: "Capital Gains Becoming Even More Concentrated Among Richest Few"

10.

See: "Taxing Capital Gains at Ordinary Rates" By Jared Bernstein

Bonus graph!

See: "Capital Gains Tax + Rainy Day Fund = Greater Economic Stability"

Elite Investment Clubs Account for Largest Share of Capital Gains

Andy Nicholas — 2012-02-28T16:32:06Z

Special access to high-end investment partnerships -- such as hedge funds -- helps to explain why capital gains are so heavily concentrated among our nation’s richest few. Accordingly, a state capital gains tax would tap into the enormous profits generated by such exclusive investment clubs, generating roughly $700 million a year in new resources for investments in education, health care, and other core economic structures.

The ability to pool resources in exclusive investment partnerships helps to explain why 96 percent of capital gains go to millionaires. The graph below shows that such high-end investment clubs were the single largest source (40 percent) of capital gains in 2007.

(Click graph to enlarge)

Hedge funds, real estate investment trusts (REITs), and other elite investment partnerships allow a small group of wealthy investors to pool their resources in a single entity or club. A major advantage of this kind of financial arrangement is that the partnership gets special, dedicated access to money managers and investment experts – access that would be more difficult for individual investors to acquire. Money managers use their expertise to reinvest the partnership’s resources into stocks and other capital assets believed to have a high rate of return. Profits from the partnership’s investments are subsequently apportioned among or “passed through” to the individual investors.

House Bill 2563 would tap into profits from hedge funds and other elite investment partnerships to help rebuild our ailing education, health care, and public safety systems. Modeled on our proposal, the measure would bring Washington more in line with the 42 other states that tax capital gains by establishing a new 5 percent state excise tax on capital gains in excess of $10,000 each year. The tax would only impact about 2.4 percent of Washingtonians, but would do much to help build a more prosperous future for all Washingtonians.

Revenue Forecast Up Slightly; Problem Not Solved

Andy Nicholas — 2012-02-16T22:23:04Z

Following this morning's release of new revenue projections from the state Economic and Revenue Forecast Council (ERFC), one thing remains clear: Washington’s flawed revenue system cannot sustain our shared investments in public health, education, and other structures. Without bold reforms, our state could face more years of anemic growth and economic hardship.

Today's forecast, which was $96 million higher than the previous estimate, is not cause for celebration. Lawmakers still must address a roughly $1 billion shortfall between available state resources and the amount needed to adequately support core public health, education, and safety services. (Assuming a comfortable amount is left in reserves at the end of the budget cycle.)

Without systemic reforms to Washington’s flawed tax structure, our state will face large fiscal imbalances for years to come. That means it would be virtually impossible for policymakers to rebuild the public systems and structures that facilitate a high quality of life and make our state economically competitive.

We must take bold steps now to reform our inadequate revenue system in the long run. Our current tax structure is overly dependent on the state sales tax. Among other problems, the sales tax has steadily lost capacity over the last 40 years to generate resources for public investments. As the graph below shows, purchases of products subject to the state sales tax (taxable retail sales) now account for about 36 percent of our total state economy – down from 61 percent in 1979.

Capital gains, a rapidly growing but unutilized resource in our state, could help reinforce our eroding revenue system. The graph below shows that capital gains grow much more rapidly compared to retail sales. Over the last economic cycle, taxable retail sales grew at an average rate of about 5 percent each year. By contrast, capital gains grew at an average rate of 21 percent each year during the same period. Accordingly, a modest tax on these resources would help rejuvenate our ailing revenue system.

House Bill 2563 would do just that. Based on our proposal, the measure would establish a 5 percent excise tax on capital gains in excess of $10,000 each year. The tax would impact less than 2.4 percent of households in Washington. Taking effect in 2014, it would generate around $700 million per year in new resources for health care, education, and other fundamental public structures.

While the morning’s revenue forecast could have been much worse, policymakers must seize the opportunity to reform our revenue system and build a more prosperous future for all Washingtonians. Enacting a capital gains tax would be a major leap toward that goal.

No Matter What the Revenue Forecast Holds, State Faces Staggering Shortfall

Andy Nicholas — 2012-02-14T21:29:17Z

Unless we take bold steps to reform our flawed revenue system, Washington state residents risk losing the chance for a full and prosperous recovery.

On Thursday, the state Economic and Revenue Forecast Council (ERFC) will release updated projections of state revenue collections for the remainder of the current year and future years. Whatever the ERFC forecast says, our state will continue to face an enormous challenge: depressed state revenues will be far short of what is needed to maintain core investments in health care, child care, education, and other public structures essential to our future economic prosperity.

Even if the ERFC forecasts stronger than expected revenue growth, available state resources will remain far below pre-recession levels, as shown in the graph below. As a result, lawmakers will continue to face a roughly $2 billion gap between available tax resources and the amount needed to maintain essential public services. Addressing this gap solely through damaging cuts to our vital health and education systems would be counterproductive and short-sighted.

As our recent analysis shows, the very foundation of our economic infrastructure has already weathered more than $10 billion in damaging cuts since the start of the Great Recession. The impact of the cuts has been broad and deep, undermining our economic security, public education, and health systems. They have impacted everyone; however they have taken an especially severe toll on women. The result of these cuts has been:

Over 60,000 low-income working adults have lost health coverage;
Over 40,000 elderly and disabled Washingtonians are getting less care in their homes, potentially forcing them into more expensive options;
More than 180,000 people have been hurt by cuts in coverage for critical medical devices such as hearing aids and eyeglasses;
Over 27,000 people have lost critical work supports (TANF), most of whom are women and children;
Over 23,000 families have lost access to child care support; and
Over 46,000 fewer women are receiving family planning services to reduce unintended pregnancies.

We don’t have to continue down this path. Regardless of the news on Thursday, lawmakers need to shore up our economic footing by raising revenues to prevent deeper cuts to our core health, education, and community safety systems. In the short run, this can be accomplished simply and efficiently by modestly increasing the state sales tax. In the long run, enacting a new excise tax on capital gains – profits on the sales of stocks, bonds, and other financial assets – would begin to address the fundamental flaws of our state revenue system.

Video: Economist Jared Bernstein Explains Capital Gains Taxes

Andy Nicholas — 2012-02-17T22:30:51Z

Looking for a quick explanation of national capital gains tax policy? The video below features Economist Jared Bernstein, former Chief Economist and Economic Adviser to Vice President Joe Biden, and Chye-Ching Huang of the Center on Budget and Policy Priorities. Bernstein and Huang explain how capital gains -- profits from the sale of corporate stocks, bonds, and real estate -- receive preferential tax treatment at the national level. They also debunk the myth that special tax treatment for capital gains has led to increased business investment and economic growth. (Spoiler alert: it hasn't.)

Here in Washington state, our proposal for a state excise tax on capital gains would help build a more adequate, equitable, and stable budget process in future years.

Updated data: Capital Gains Still More Concentrated Among Wealthiest Few

Andy Nicholas — 2012-01-31T16:33:53Z

The capital gains tax proposed in House Bill 2563 represents a bold path to a more stable and adequate revenue system in our state. The measure would create a new 5 percent excise tax on capital gains in excess of $10,000 each year in Washington state. As we’ve discussed previously (here and here), capital gains – profits on the sale of corporate stocks, bonds, and real estate assets – are highly concentrated among the richest households in our nation. However, new data from the nonpartisan Tax Policy Center (TPC) shows that capital gains have become significantly more concentrated among the richest few since the onset of the Great Recession.

As of 2010, the TPC’s data show that 96 percent of capital gains were going to a small minority of very wealthy households – those with incomes above $1 million per year (see graph below). Furthermore, on average, households earning less than $200,000 per year experienced net capital losses in 2010, meaning they lost money on sales of stock or other capital assets. (Capital losses would not be taxed under HB 2563. In fact, capital losses are deductible from federal income taxes.)

The extreme concentration of capital gains among the richest Washingtonians means that a tax on these resources would be paid almost exclusively by those at the top of the income scale. Even so, HB 2563 goes a step further by establishing an exemption on the first $10,000 of capital gains ($5,000 for single filers). The $10,000 exemption would limit the tax to only about three percent of Washingtonians.

Accordingly, the measure would tap into a highly concentrated economic resource in order to sustain our public investments in health care, education, and safe communities – all vital to long-term and broadly shared economic growth.

For more information check out our policy brief, “A Capital Reform: Using Capital Gains to Fuel Job Creation and Economic Prosperity in Washington State.”