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Showing blog entries tagged as: Capital Gains

Final budget brings momentous victories for communities, but property tax cuts will come at a cost

Posted by Kelli Smith at Mar 14, 2018 02:30 PM |

In the final 2018 supplemental budget, Democratic leaders in the state House and Senate reached compromises to make several laudable new investments in our schools and communities – including some very worthy investments that advocates for low-income communities and communities of color have promoted for years. But lawmakers also cut next year’s state property tax using accounting gimmicks that may leave the state in financial trouble for years to come. Not only did budget writers choose to pay for these across-the-board property tax cuts with funds that should have gone toward the state’s emergency savings, they also missed opportunities to strengthen our state tax code. 

No doubt the investments lawmakers made in our communities – from making breakfast available for students in high-poverty schools to expanding health care access – will put many on a much brighter path forward. But these investments would have been more sustainable and better for the well-being of our state if policymakers hadn’t decided to prioritize short-term tax cuts over maintaining healthy fiscal reserves for the longer term.

Lawmakers should not have compromised the rainy day fund to pay for property tax cuts

In a slight variation on what both the House and Senate put forth in their earlier budget proposals, the final budget diverts funds from the rainy day fund to pay for inequitable and unnecessary property tax cuts next year. As we have written previously, any property tax reform should be targeted to low- and middle-income households that already pay a higher share of their income in taxes than the wealthy do. Higher-income households don’t need any more tax breaks.

When economic times are good, as they are now, our state should be building up reserves – not squandering them on tax cuts. Instead of depositing this year’s unforeseen revenue growth into our state’s rainy day fund, budget writers enacted a legislative maneuver that allowed them to get around their savings requirement and instead put that money toward cutting the recently enacted state property tax levy. In the long term, compromising the state’s emergency savings to pay for tax cuts is fiscally irresponsible, and it will leave our communities vulnerable when real emergencies – like natural disasters or major economic downturns – strike. 

Lawmakers missed an opportunity to enact a capital gains tax to bolster community investments and rebalance our tax code

Lawmakers once again had the opportunity this session to make solid investments in schools and other community priorities in addition to ensuring the strength of our state’s long-term fiscal health. They could have done that by closing the tax break on capital gains, which would have generated more than $700 million annually to put toward our most important priorities. This move would have also been a significant step toward rebalancing our worst-in-the-nation tax code, in which people with low and middle incomes pay up to seven times more in taxes as a share of income than the top 1 percent do.

To put the need for this new form of revenue in context: When adjusted for economic growth, our state is still well below the investment levels it had before the Recession (see chart below). That is despite the fact that lawmakers have made significant investments in K-12 schools. 

Lawmakers must get serious about making our tax code more equitable, adequate, and sustainable if they want to ensure we have a state where everybody has the chance to thrive. That starts with closing wasteful tax breaks like the one on capital gains.

Click on image to enlarge.


On the bright side, the final budget makes progress on strengthening Washington’s communities

Despite the missed opportunities in some parts of this budget, there is a lot to celebrate in terms of the investments that lawmakers prioritized with the resources they had. Included below are snapshots of how well the final budget promotes the well-being of Washingtonians based on the Budget & Policy Center’s Progress in Washington framework

Education & job readiness

Our education system must have the resources to prepare all students – from early learning through higher education – for good jobs and jobs of the future. It should prioritize removing barriers to education and employment for communities of color. Investments in education and job readiness make up 60 percent (1) of total community investments in this budget. In the supplemental budget, lawmakers:

  • Prioritized funding teacher salaries per the Supreme Court’s McCleary order. After House Democratic leaders initially neglected to propose minimum funding for teacher salaries by next school year per the Supreme Court’s McCleary order, budget writers ultimately settled on providing nearly $800 million in additional K-12 school funding to fulfill the state’s paramount duty to fund education. Even though there is still much work to be done to ensure world-class schools for all students, this is a positive step toward bringing the years-long Supreme Court battle to an end. 
  • Expanded learning opportunities for K-12 students. The final budget includes much-needed additional funding for special education, which is critical to providing every student with the resources they need to learn. Lawmakers also included modest funding for a bilingual educator pilot initiative and dual-language programs, which are evidence-based strategies to close the opportunity gap for students who are English-language learners. 
  • Made progress toward ensuring kids have access to a nutritious breakfast each school day. After years of debate and advocacy, lawmakers included funding for Breakfast after the Bell, a program to ensure that more of our state’s lowest-income students have access to a nutritious breakfast each school day. This is a significant step in the right direction toward providing kids with the most basic thing they need to learn: food. 
  • Took significant steps forward to provide financial aid to college students with low incomes. The final budget invests an additional $18.5 million in the State Need Grant, the state’s chronically underfunded financial aid program for college students. This is a significant boost to funding, which will provide financial aid to an additional 4,600 students who need it and cut the program’s wait list by 25 percent next year. The legislature plans to eliminate the wait list by 2022, but they will need to make additional investments in the coming biennium to accomplish this goal. 
  • Focused on targeted, proven child care and family support programs. Lawmakers made some modest but impactful investments in these areas. Chief among them was funding to provide 275 additional families with home-visiting services – a proven and targeted program that gives in-home resources to new and expecting parents to help them lay a strong foundation for their child’s development and health. 
  • Did not make significant progress to improve broad access to early learning for the youngest Washingtonians. Early learning should be one of the legislature’s top priorities in next year’s budget. Lawmakers will need to grapple with how to provide funding for the planned expansion of the state’s Early Childhood Education and Assistance Program, as well as how to strengthen the Working Connections Child Care program to ensure that all families across the state have access to affordable, high-quality early learning and child care.
  • Should have done more to provide outside-the-classroom support for K-12 students who need it. Next year, lawmakers should take up strengthening investments in family involvement coordinators, guidance counselors, and other outside-the-classroom resources to help school kids – especially those facing the most significant barriers to opportunity – get the most out of their education.

Healthy people & communities

Our state should support vibrant communities that allow Washingtonians to lead healthy lives and better connect to and participate in the economy. Investments in healthy people and communities make up 25 percent of total community investments in this budget. Lawmakers: 

  • Expanded health care access for many Washingtonians. Lawmakers improved access to health care for kids from families with low incomes by increasing the reimbursement rate for doctors who care for them. They also rightly included funding to expand access to health care for Washingtonians who are citizens of Compact of Free Association (COFA) nations – the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau. Citizens of COFA nations are legal residents of the U.S. who work, pay taxes, and serve in the U.S. military – but are ineligible for Medicaid health care coverage. 
  • Made necessary additional investments in behavioral health services. The final budget includes funding necessary to bring our state’s mental health hospitals into compliance with federal safety standards, which was a priority in both the House and Senate budgets. Lawmakers also included significant funding to improve community behavioral health services and opioid treatment across the state.
  • Fixed health-care-related accounting stunts from last year’s budget. The final budget provides funding to make up for millions of dollars in unrealistic health care and pharmaceutical cost savings assumed in last year’s budget to make the books balance.

Effective & accountable government

The state government supports the foundations of our communities. Our public institutions should efficiently and reliably ensure that all Washingtonians can meaningfully participate in our democracy. Investments in effective and accountable government make up 9 percent of total community investments in this budget. Lawmakers:

  • Enacted reforms to enable people to re-enter their communities more easily after being incarcerated. This budget includes funding to help administer long-needed reforms to our state’s legal financial obligations (LFOs), which are high-interest legal fines and fees imposed by criminal courts on top of a criminal sentence. The reforms in this bill will remove some of the financial barriers that previously incarcerated Washingtonians face when they re-enter their communities.
  • Strengthened resources to help people with low incomes navigate the legal system. Lawmakers boosted resources for people with low incomes who need civil legal help. This will have significant positive impacts on the lives and communities of those people who need such legal support.

Economic security

All Washingtonians should have access to employment opportunities, living-wage jobs, and financial security and stability; and they should be economically secure in the face of a financial emergency. Investments in economic security make up 2 percent of total community investments in this budget. Lawmakers:

  • Restored some of the devastating cuts made in recent years to poverty-reduction programs. The final budget takes some significantly positive steps to improve services for Washingtonians with low incomes by undoing some of the cuts made in recent years to basic assistance grants for people who participate in WorkFirst, the State Food Assistance Program, and the Refugee Cash Assistance Program. The budget also expands eligibility for the Housing and Essential Needs program, which provides housing-related assistance to people unable to work because of disabilities.
  • Made common-sense reforms to public-assistance programs. Lawmakers smartly raised the financial-asset limit for people with low incomes who receive public assistance. This move will improve a previous law in which people living in poverty were forced to sell a decent car or spend down their savings to below $1,000 in order to receive help climbing out of poverty. 
  • Set up a study to ensure the WorkFirst program can meet the needs of the thousands of families that need help getting out of poverty. The budget includes funding for an important study of how the state could take steps to halt the rapid decline in the WorkFirst caseload, which is leaving more than 33,000 Washington families in poverty without basic support. The study calls for the state to investigate the impact of implementing recommendations the Budget & Policy Center made in our recent policy brief, “Reinvest in WorkFirst: How we can restore the promise of basic support to Washington families facing poverty.”

(1) Percentages mentioned in each value area do not add up to 100. That is because funding for prisons and policing, which are not part of the Progress in Washington value areas, constitute 5 percent of spending from the Near General Fund + Opportunity Pathways account.



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In final budget, lawmakers should take the best from House and Senate proposals

Posted by Kelli Smith at Feb 23, 2018 05:10 PM |
Filed under: State Budget, Capital Gains

The state House and Senate, both controlled by Democrats this legislative session, have proposed budgets that contain strong investments that would take steps toward ensuring that all Washingtonians have what they need to prosper. Lawmakers have the chance to enact much-needed new forms of revenue and make our tax code more equitable. There is no reason lawmakers shouldn’t include the best ideas from each proposal in their final budget. 

As they create this final budget, they should also take into consideration the fact that state investments in communities have still not reached pre-Recession levels. In fact, overall near general fund spending in each of these budget proposals is still below spending levels in the 2007-09 budget cycle, when adjusted for economic growth. At the end of the day, the state budget must reflect our values and meet the needs of our communities in a real way. 

Lawmakers should close the tax break on capital gains, reject new tax breaks

The House’s budget proposal includes a plan to close the tax break on capital gains, which would be a significant step forward in making our tax code more equitable. Washington’s tax code is completely upside-down: low- and middle-income households pay up to seven times more in state and local taxes than the top 1 percent do. A capital gains tax would affect fewer than 2 percent of the wealthiest Washingtonians – and only modestly at that. Further, revenue from a capital gains tax would diversify and strengthen our tax code, putting resources for important community investments within reach. Budget negotiators should include this common-sense proposal in the final budget.

They should also reject new tax breaks that siphon resources out of our communities and turn them into tax giveaways for special interests. A prime example of such a giveaway is the proposed rural manufacturer tax break, which is funded in the House’s budget. It’s a narrowed version of the flawed manufacturer tax break that Governor Inslee smartly vetoed last year. This tax break would cost the state millions of dollars a year that could be used instead to fund schools, help families put food on the table, or provide much-needed senior services. The bottom line is that right now is the time to clean up our tax code to invest in the priorities we all care about – not add more tax breaks.

Lawmakers should not use the rainy day fund to pay for property tax cuts 

While the details of the House and Senate proposals differ when it comes to the use of rainy day funds, both plans would raid our state’s emergency savings to pay out statewide, across-the-board property tax cuts. As we wrote when lawmakers raised the state property tax last year to fund schools, any reforms to the property tax should be targeted specifically to making the tax more equitable for low- and middle-income families. Across-the-board cuts just give higher-income households more tax breaks they don’t need.

More importantly, using the state’s emergency savings to pay for tax cuts is incredibly irresponsible under any circumstances – but especially so during good economic times when our state should be building up reserves, not drawing them down. The rainy day fund is an essential safeguard to fund the most critical foundations – such as safe hospitals, functioning schools, and responsive emergency services – when our state endures an economic downturn or a natural disaster. 

Instead of paying out property tax cuts to many households who don’t need it, lawmakers should think about the well-being of our entire state. That means ensuring we have the resources we need to invest in our communities now, and that we have reserves to weather emergencies.

The final budget should invest in Washington’s communities

Included below are snapshots of how successful the two budget proposals are at promoting the well-being of Washingtonians, using the Budget & Policy Center’s Progress in Washington framework

Education & job readiness

Our education system must have the resources to prepare all students – from early learning through higher education – for good jobs and jobs of the future. It should remove barriers to education and employment for communities of color. Here’s how the budgets stack up in terms of: 

K-12 schools. One of the most significant differences between the House and Senate proposals is that the Senate increases funding for K-12 teacher salaries by $778 million this budget cycle to comply with our state Supreme Court’s McCleary order by the 2018 school year. House budget writers opted to ignore the Court’s order and instead put off fully funding McCleary until next year, a choice that would leave teachers and students in limbo for yet another year. Budget negotiators should follow the Senate’s approach and fulfill their court mandate to fund schools now. Students – and their teachers – have waited long enough.

Both budgets would also increase funding for special education – a positive step toward ensuring that schools can provide a rich learning environment based on the needs of all of their students. 

In addition to meeting the minimal requirements of McCleary, budget writers should ensure that the final budget contains ample funding for services that we know give students the best access to opportunities. These include investments such as Breakfast after the Bell – an essential step toward ensuring that kids who may otherwise show up to school hungry have access to breakfast each school day. The Senate budget contains some funding for the program, but more is needed in the final budget. This is a moral imperative: kids can’t focus on learning when they’re hungry. The final budget should also include additional funding for family involvement coordinators and guidance counselors, as proposed by the House, to ensure that students have the resources they need outside of the classroom. 

Early learning and child care. Both the House and Senate propose small but important new investments in the state’s home visiting program, which has proven effective at providing in-home resources related to infant care, child development, and parenting skills. While this is a step in the right direction, state lawmakers should commit to expanding access to affordable child care and fully funding high-quality early learning to serve more kids from low-income families. 

Higher education. The House budget proposes a substantial new investment of $158 million over the next four years in the State Need Grant, our statewide financial aid program, which would eliminate the long-standing waitlist of eligible but unserved students by 2021. This would be a remarkable step forward to put higher education within reach for thousands of students from low-income families and ultimately strengthen Washington’s workforce. The final budget should take the House’s approach.

Healthy people & communities

Our state should support vibrant communities that allow Washingtonians to lead healthy lives and better connect to and participate in the economy. Here’s how the budgets stack up in terms of: 

• Health care. In last year’s budget, lawmakers assumed millions of dollars in unrealistic health care and pharmaceutical cost savings in order to make the budget balance. Those savings predictably did not materialize, so both plans would restore funding to those areas to make up the difference. 

Both budgets include an increased reimbursement rate for doctors who provide care for kids from low-income families, as well as increased funding for behavioral rehabilitation service providers who deliver intensive, comprehensive care for kids with high-level behavioral health needs. 

Both budget proposals also include important funding that would expand health care access to Washingtonians who are citizens of Compact of Free Association (COFA) nations – the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau. Citizens of COFA nations are legal residents of the U.S. who work, pay taxes, and serve in the U.S. military – but are ineligible for Medicaid health care coverage. The final budget should take the Senate’s approach of fully funding this investment. 

• Behavioral health. Both House and Senate leaders propose increasing funding for Western State Hospital to comply with federal safety and quality requirements, and they both propose additional investments in community behavioral health treatment services. These are steps in the right direction to improve the quality and accessibility of behavioral health care across Washington’s communities.

Effective & accountable government

The state government supports the foundations of our communities. Our public institutions should efficiently and reliably ensure that all Washingtonians can meaningfully participate in our democracy. 

Both budgets include funding to help people access essential public services, such as: enhancing our state’s emergency 911 system, streamlining how people access family law courts, and strengthening resources for Washingtonians with low incomes who need civil legal help. In addition, the House plan includes funding for economic development, such as a small business innovation exchange, which would support small businesses owned by women, veterans, and people of color. These are critical services that should remain funded in the final budget. These programs not only have significant impacts on the people who use them, but they also make all of our communities stronger.

Economic security

All Washingtonians should have access to employment opportunities, living-wage jobs, and financial security and stability; and they should be economically secure in the face of a financial emergency.

Both budgets smartly propose to strengthen services for Washingtonians with low incomes by restoring cuts made in recent years to grants for people with lower incomes who participate in WorkFirst, State Food Assistance, and Refugee Cash Assistance programs. The final budget should include those investments, plus proposals by House leaders to expand eligibility for the Housing and Essential Needs program, which provides housing-related assistance to people unable to work because of disabilities. It should also raise asset limits for low-income Washingtonians who receive public assistance, as proposed by the House.

The House and Senate budget writers have until March 8 to finalize their budget. With opportunities for new revenue and a number of good ideas on the table, they should be able to come up with a spending plan that will benefit all of Washington’s communities into the future. 


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Hedge Funds vs. Mom-and-Pops: The Truth about Small Businesses and Closing the Capital Gains Tax Break

Posted by Kelli Smith at Apr 27, 2017 04:50 PM |
Filed under: Capital Gains
By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst
Small businesses thrive when colleges and trade schools, transportation infrastructure, job training, technological research, and other economic pillars are strong. In Washington state, lawmakers can generate more than $700 million per year in new resources for these and other investments that strengthen small businesses by eliminating a massive state tax break on capital gains, which are profits from the sale of corporate stocks, bonds, gold bars, and other high-end financial assets. As we’ve written previously, this tax break overwhelmingly benefits the richest 1 percent of Washington state residents. Closing this tax break, as state Democratic House leaders are smartly proposing, would have little impact on most genuine small businesses, as they very rarely receive capital gains as part of their ordinary business activities.

Special interests that are opposed to closing the tax break on capital gains misleadingly claim that the House’s proposal would harm small, individually- or family-owned businesses, such as restaurants, auto repair shops, gas stations, and family farms. In reality, this common and sympathetic perception of small business owners is being exploited to shield ultra-wealthy shareholders and partners in investment hedge funds, shell corporations, and other elite financial arrangements from paying higher taxes.

Many “small businesses” are very wealthy individuals engaged in finance activities

Historically, small business ownership has been a pathway to prosperity among hardworking lower- and middle-income households striving to build better lives for themselves and their families. But since the 1980s, extremely wealthy households have increasingly pooled their wealth by forming partnerships and small, private corporations called “S corporations.” In many cases, financial advisers and attorneys for the wealthy draw up these business entities for their clients so they can take advantage of significant federal tax benefits allowed for these types of business structures.

It’s important to note that many S corporations and partnerships are rightly considered to be small businesses because they carry out important economic activities, such as hospitality services, legal services, manufacturing, and other traditional small business activities. But the bulk of wealth for these kinds of business arrangements comes from a small number of elite investment partnerships, like hedge funds, that cater exclusively to the richest 1 percent. As of 2011, 70 percent of business income generated by partnerships comes from those engaged in finance and holding companies (shell corporations). (1)

The explosive growth in elite partnerships and S corporations involved in finance activities since the late 1980s has led to an extreme concentration of all small business wealth and income among the very richest households in the United States. As the graph below shows, 69 percent of income from partnerships and 66 percent of income from S corporations now accumulate to the richest 1 percent. As of 2011, someone in the richest 1 percent is 50 times more likely to have any positive small business income than someone in the bottom 50 percent of the population. 

Click on graphic to enlarge.


Being linked with genuine small business owners – those who are not engaged in these elite finance activities – has become politically convenient for extremely wealthy people with assets in hedge funds and investment firms. Hedge fund and investment firm partners know they can likely defeat any effort to raise their taxes if the public believes doing so would impact owners of convenience stores, small farms, or auto repair shops.

Most true small businesses don’t receive capital gains as part of their ordinary business activities

Partnerships and S corporations do not directly pay federal taxes on their ordinary business income and capital gains. Instead, ordinary business income and capital gains are “passed through” to the individual partners or shareholders, who in turn pay taxes on them as part of their personal federal income taxes. Under the proposal from House Democrats, wealthy households that live in Washington state who receive pass-through capital gains from exclusive investment partnerships would be taxed on those gains, to the extent they exceed $25,000 ($50,000 for married couples) per year.

But most genuine small businesses don’t receive capital gains as part of their ordinary business activities. Only 3.3 percent of total business income from sole proprietorships comes from finance-related activities, which are the most likely to reap capital gains.(2) And when it comes to partnerships, the overwhelming majority of capital gains (80 percent) accrue to securities brokerages, holding companies, and other high-end financial management firms that cater to the richest households (see graph below). Capital gains are negligible among partnerships involved in farming, retail trade, manufacturing, and other activities not related to finance.

Click on graphic to enlarge.

Capital gains by industry

The current proposal includes numerous exemptions that would benefit small businesses

Finally, groups that advocate for so-called small businesses with investments in hedge funds and other wealth-accumulation vehicles argue that traditional small business owners would pay the proposed capital gains tax when they sell their business. But this claim ignores numerous exemptions that would benefit small businesses in the current proposal – including those on small business equipment, farmland and farm equipment, livestock, timber, and more.

Perhaps even more importantly, by exempting the first $25,000 for individuals ($50,000 for married couples) in all capital gains from taxation, the proposal from House Democrats would prevent capital gains tax increases for many households selling ownership stakes in a partnership or S corporation. That’s because the median gain from the sale of a partnership or S corporation is less than $5,000, well below the proposed exemption threshold, according to 2010 data from the nonpartisan Congressional Budget Office. And 70 percent of capital gains from the sale of a partnership or S corporation in that year went to millionaires and billionaires.

It is undeniable that the bulk of capital gains taxes would be paid by the powerful few, who have manipulated the tax code in their favor to the detriment of traditional small business owners who serve our communities through their businesses. On balance, small business owners will benefit from investments in strengthened public services that reinforce their businesses and their communities – and these improvements would be made possible by eliminating the tax break for capital gains enjoyed by the very wealthiest Washingtonians.


1. Michael Cooper, et al., "Business In the United States: Who Owns It, And How Much Tax Do They Pay?" National Bureau of Economic Research, 2016,

2. Washington State Budget & Policy Center Calculations; data from the Internal Revenue Service, Statistics of Income, Sales of Capital Assets, long-term capital gains, 2014.

Lack of a State Capital Gains Tax Means Wealthiest 1 Percent Get a Huge Tax Break in Washington State

Posted by Kelli Smith at Apr 19, 2017 05:45 PM |
By Andy Nicholas, associate director of fiscal policy

Currently, our state tax code caters to the wealthiest Washingtonians by giving them generous tax breaks on their capital gains – which are the profits they make from the sale of corporate stocks, bonds, gold bars, and other high-end financial assets. Such financial assets are exempt not only from state and local sales taxes, but also from property taxes, and most business & occupation (B&O) taxes. The simplest and most equitable way to effectively close these state tax breaks is to enact a state excise tax on high-end capital gains. Doing so would generate substantial new resources for Washington state’s schools and other investments that foster thriving communities. Eliminating the tax breaks on profits from capital assets in this way would represent a significant step toward turning Washington’s inequitable, upside-down tax code – in which people with low incomes pay seven times as much in state and local taxes as a share of income as the wealthiest 1 percent – right-side-up.


Click on graphic to enlarge.


Democratic leaders in the state House of Representatives have sensibly proposed to close the loopholes on most profits from capital assets in Washington state’s tax code with a new 7 percent excise tax on capital gains above $25,000 ($50,000 for a married couple). As the chart above shows, 92 percent of capital gains taxes would be paid by the wealthiest 1 percent of Washington’s families – those with incomes above $600,000 per year. By contrast, virtually none of the additional tax revenue would come from families with incomes below $119,000 per year. Only 0.03 percent of households in that group would pay any additional taxes.

Closing the capital gains tax break would generate more than $700 million per year in new resources for schools, child care, environmental protection, and other priorities that serve Washingtonians. And the additional payments from the few households that would be impacted would be relatively small. As the chart below shows, on average, taxes would increase by only 1.5 percent as a share of annual incomes among the richest 1 percent of households in Washington state. This is a small price to pay for the people who have benefited most from our economy to ensure that all kids have access to great schools and all Washingtonians can have thriving communities.

Click on graphic to enlarge.


The excise tax on capital gains proposed by House Democrats is the most sensible way to address the numerous tax breaks for capital assets on the books in Washington state, which include exemptions and exclusions from the sales tax, property tax, and B&O tax (Washington's three major revenue sources). When it comes to the sales tax, for example, people don't have to pay it when they buy or sell stocks, bonds, and other high-end financial assets (or intangible goods). But Washingtonians do pay sales tax when they buy tangible goods, like cars, appliances, soap, and toothpaste. Because stocks and other financial assets are heavily concentrated among the wealthiest households, their exclusion from taxes gives a huge advantage to wealthy Washingtonians.

The capital gains proposal in Washington state would be simple for taxpayers and cost-effective for the state to administer because it would be based on the federal capital gains tax. Further, it would be almost impossible for the few wealthy households subject to the tax to evade it. That’s because liability for the tax would be based on where the taxpayer lives, not where their stock trades occur.

As the regular legislative session comes to an end, the budget writers in Olympia who are seeking to fund schools and other key priorities need to close the capital gains tax break.

Don’t Let the Talking Points Fool You: Senate Republicans’ Budget Proposal Is a House of Cards

By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst

The state budget is not just a statement of our values. It is also a foundation and framework for delivering the everyday services that benefit us all – like ensuring everyone has the opportunity to thrive, making sure we have clean water to drink and air to breathe, and keeping school buses and fire trucks running each day. Republican leaders in the state Senate have proposed a two-year spending plan that would profoundly weaken that framework by slashing vital investments that help Washington’s communities and people prosper – and by failing to come up with the revenue needed to fund schools and other key priorities. Their plan would turn the state budget into a house of cards, at risk of collapsing at the first sign of a slowdown in the economy. And the human cost in terms of the well-being of Washingtonians would be staggering.

Building a responsible and sustainable budget requires lawmakers to take steps toward fixing Washington’s upside-down tax code, which taxes middle- and lower-income households at significantly higher rates than those at the very top of the income scale. Yet the proposal from Republican leaders in the state Senate offers no meaningful reforms to the state’s flawed tax code.

Far from raising the substantial new revenue needed to fully fund education and protect the programs that help Washingtonians who are struggling to make ends meet, their “levy swap” proposal would actually reduce overall property tax resources for schools in our state. It would also be deeply inequitable, raising taxes on millions of lower- and middle-income homeowners and renters in the Puget Sound region.

What’s more, Senate Republicans actually propose creating or extending nine tax breaks, totaling $13.5 million in giveaways in the 2017-2019 budget cycle.

Rather than working to flip our tax code right-side up and improve our quality of life, Senate Republican leaders propose a state budget that nominally balances, but only with the help of unsustainable gimmicks, such as:

  • Forcing future lawmakers to make deep cuts to non-K-12 investments – such as health care, child care, job training, safe communities, and other important investments – by dedicating all future revenue growth to maintaining K-12 spending and property tax cuts.
  • Draining $700 million in reserve savings from our state’s rainy day fund, the budget stabilization account, which is an essential backstop that prevents severe disruptions in funding for our most important services during recessions and other state emergencies. And Senate Republican leaders offer no plan to replenish it.
  • Sweeping $63 million from Temporary Assistance for Needy Families (TANF) to pay for other unrelated budget items. TANF is an essential resource for families trying to get back on their feet. This proposal would take much-needed resources out of programs that help the people who have the hardest time making ends meet and dole those resources out for other investments. 

As shown in the chart below, the budget proposal from Senate Republicans would boost state funding for education, but at the expense of essential investments in Washingtonians’ economic security and in community development and trust. Within those categories are programs that are essential to many Washingtonians – programs like TANF, Housing and Essential Needs, state retirement contributions for first responders, and the programs we all count on to protect our legal rights. Thousands of Washingtonians’ lives would be severely and negatively affected by these cuts – and in many cases, they are the people who are already struggling just to get by every day.

(Click on graphic to see enlarged version.)

Senate budget 2017 graphic













The proposed changes to funding, according to the major value areas laid out in the Budget & Policy Center’s Progress Index framework, are detailed in the sections that follow.


The McCleary Supreme Court case’s school funding mandate has been the most prominent issue in the legislative session so far – and for good reason. Excellent schools are one of the foundations of a thriving economy, and the legislature is facing a deadline for fully funding those schools. While the Senate’s proposed budget increases K-12 education funding by $1.8 billion, or by 7 percent, it makes huge cuts to early learning – slashing $36 million from child care programs. This is because the Senate doesn’t actually raise the necessary new revenue to fund K-12 education, despite the speaking points that make it sound otherwise. The proposals include:

  • Undermining the foundations for high-quality early learning, especially for low-income children and families. The Senate plan would limit access to Washington’s Early Childhood Education and Assistance Program – our state’s preschool program that serves families living in poverty – by eliminating 3 year olds from the program and not adding any new slots over the next two years despite 23,000 unserved eligible children in the state. It also guts Early Achievers, our state’s key resource for early learning professionals to access coaching and tools to provide high-quality early care.
  • Repealing voter-approved education initiatives. The budget would repeal initiatives 1351 and 732, measures passed by Washington voters to reduce class sizes and fund teacher cost-of-living raises. Refusing to implement voter-approved teacher cost-of-living raises is out of step with the goal of fully funding K-12 education.
  • Overhauling the current school funding formula to change the way state disburses money to schools throughout the state. Even though the plan would require sizeable and commendable new investments in K-12 schools, the Senate has proposed to pay for its plan with a levy swap proposal that would actually reduce property tax resources for schools compared to the current system.
  • Prioritizing STEM and medical education over the needs of struggling working families. The Senate’s budget provides some increases in the higher education budget. But these investments would come at the expense of the lowest-income working families: $47 million is ransacked from WorkFirst – Washington’s job training and assistance program for families with young children who are trying to get back on their feet – to pay for them. Lawmakers should not be pitting working the needs of families against those of people seeking higher education opportunities.


A community with a thriving economy fosters great jobs and supports working families, ensures stable and healthy housing for everyone, and provides economic opportunity for Washingtonians to meet their basic needs. The Senate Republicans’ proposal eviscerates the parts of our budget that make these values a reality for residents, particularly targeting those programs that relieve hardship among the lowest-income working people. This budget would cut funding for economic security by $132 million, a staggering 13 percent decrease from the amount necessary to maintain current services. Proposed changes include:

  • Cutting assistance for people with disabilities at risk of homelessness. This proposal would do away with the Housing and Essential Needs program that provides housing-related assistance to people unable to work because of disabilities. It replaces it with a new program that would only be available to people with dependent children, essentially eliminating services for seniors and single adults and all but guaranteeing an increase in homelessness. It also cuts another crucial program for people with disabilities – the Aged, Blind, and Disabled program – by limiting the time people can be on it to 36 months.
  • Ransacking resources from job training programs to plug holes in other parts of the budget. The proposal moves $63 million out of the WorkFirst program and uses the money for other unrelated purposes, such as replacing funding cuts to colleges and universities.
  • Pushing people off basic assistance and making it harder for new people to get on. TANF provides basic supports to families with children who are financially struggling. The Senate Republican budget would cut people off the program who have a disability, or people who are needed at home to care for a family member with a disability. It would also require new applicants to prove that they have been unable to find a job before applying for benefits, but it fails to provide necessary help to applicants in their efforts, such as providing for child care while parents are job-hunting. When other states have implemented similar procedural hurdles for families, they saw increases in hardship and spikes in homelessness.
  • Limiting options for working families to access child care so parents can go to work. The plan makes Working Connections Child Care, Washington’s largest child care subsidy program for families with low incomes, more difficult to access by changing eligibility requirements, capping enrollment, and creating more red tape for participants.


Washingtonians enjoy clean air and water and an excellent health care system that supports the wellbeing of a vast majority of Washington’s residents. The state budget provides for those benefits by investing in public health clinics, climate protection measures, and mental health services. The proposal would increase funding in this area by only $75 million, a less-than-1-percent boost. The proposals include:

  • Failing to provide adequate investments in mental health services. Compared to the budget proposed by Governor Inslee, this budget falls short on the immediate investments to address safety and staffing issues at Western State Hospital – in fact, this proposal would close down two entire wards – and fails to make the investments needed to build a strong community system into the future.
  • Missing opportunities to invest in public health, and to safeguard against proposed federal cuts. As the federal government considers cutting back federal support for health care, it is alarming to see leaders in our state Senate propose underinvestment in our public health system and health benefits for state workers. The budget also threatens the health insurance coverage for tens of thousands of home care workers who support our vulnerable seniors and people with disabilities.
  • Threatening health care innovation reforms that are part of the Washington State Medicaid Transformation Project. This initiative is designed to help Washingtonians achieve better health outcomes, to reward high-quality care, and to curb health care costs in the state Medicaid program. The Senate’s budget would create a roadblock to continuing this initiative and to receiving the $1.5 billion in federal funds it was slated to receive.
  • Reducing investments in programs that are protecting our state’s air and water. The proposal fails to provide resources to adequately sustain work to clean Puget Sound, a clean-up project that is also facing a federal funding threat from the Trump administration’s proposed budget. And no state funding is provided to implement the Clean Air Rule, an effort by Inslee’s administration to reduce carbon pollution in our state. The proposal would also cut or fail to fund investments in restoring salmon and protecting habitat.


Good quality of life for Washingtonians includes safe communities to live in, access to beautiful parks and historical spaces, an open government that runs smoothly and efficiently, and the assurance of transparent and fair elections. This budget would undermine community development and trust by cutting current programs by $107 million, a 1.8 percent decrease from maintenance levels. The major changes include:

  • Failing to invest in tens of thousands of front-line workers, like nurses, home care workers, child care workers, highway maintenance workers, and other public employees by rejecting collective bargaining agreements already negotiated (with the exception of corrections workers and Washington State Patrol troopers and lieutenants). It also exacerbates ongoing issues with recruitment and retention throughout state government by mandating indiscriminate layoffs at state agencies. This would make it nearly impossible for our state agencies to deliver high-quality, timely services to the public.
  • Reducing resources for those who serve to uphold the law for all Washingtonians. Under this budget, state agencies that work to protect the legal rights of everyday citizens would see huge cuts. The Office of Civil Legal Aid would be cut by $10 million (36 percent) and the Office of the Attorney General, which represents our state in legal matters that benefit us all, such as lawsuits against the federal government, would be cut by $20 million (78 percent). The cuts to the Office of the Attorney General in ongoing funding would be temporarily replaced by shifting one-time resources from a lawsuit.
  • Reducing state contributions to retirement systems for first responders. Contributions to retirement systems are reduced by $159 million (a 74 percent reduction from maintenance levels), largely because of a $109 million cut to retirement contributions for police and firefighters.

The state Senate Republican leaders take a page out of the book of Republicans in the other Washington – making deep cuts to the very investments that people throughout our state rely on, and across every area that we use to measure progress. It would be particularly stark for the people who are struggling to make ends meet. And it also includes a host of irresponsible and unsustainable financial stunts that add up to a budget that would collapse under its own weight.

A solid budget framework is the foundation for a strong economic future for Washington and its people. The Senate Republicans should rework their budget with an eye toward strengthening our state’s communities and the foundations that support them.

Our New Revenue Reform Plan Would Hold Lawmakers Accountable to Communities

By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst
Great schools, access to health care, safe communities, and other priorities are key to a strong economy and quality of life in our state. By investing in these priorities, lawmakers secure a brighter future for our state and its people.

But during the current legislative session, lawmakers are still struggling to find common ground on how to invest in schools and other key priorities. It’s essential that legislators take a bold, equitable path to fund our state’s most important investments and to bring greater balance to our tax code. The Budget & Policy Center has developed a plan that would do just that. This plan, called Accountable Washington, includes a package of reforms that would infuse $2 billion annually into our communities in the coming years, while significantly reducing taxes for Washington households with middle and low incomes. Additional details of the plan are available in this fact sheet.

As the chart below shows, taxes would decline by an average of 5.1 percent among the households with annual incomes that fall in the bottom fifth of Washingtonians. Households in the middle of the income scale would see their taxes decrease by 0.6 percent. By contrast, the richest 1 percent would see their taxes rise by 2.1 percent of annual income – a small price to pay for heightened investments in our communities. 

Click on the graphic below to see an enlarged version.


Given the urgent need to fund state Supreme Court-mandated improvements to schools across the state, all of Washington’s children would be an important beneficiary of Accountable Washington. Further, this plan would ensure that lawmakers can fully funds schools while also keeping up investments in other programs that serve Washingtonians – such as responsive emergency services, clean water, food for kids who are hungry, and job supports for working parents. 

While looking to enact solutions to ensure we have adequate state investments, lawmakers should also be mindful not to raise new revenue on the backs of low- and middle-income households. These households already pay up to seven times more in state and local taxes as a share of their incomes than people at the top of the income scale. 

Accountable Washington would begin to clean up and rebalance our inequitable tax code in a way that raises billions of dollars in much-needed new resources. Here’s what it would do:

  • Enact smart, equitable reforms to the property tax, including eliminating an indiscriminate restriction on property tax revenue and offering in its place a new, targeted property tax rebate, which we call the safeguard rebate, for families earning $75,000 or less. Property taxes are the most significant source of funding for schools, and both state and local property taxes are at the center of the school funding debate. Under Accountable Washington, lawmakers can make the property tax code more sustainable and more equitable by raising the state property tax rate by $1.54 per $1,000 of assessed value and enacting a safeguard rebate to offset these increases for households with low and middle incomes. 
  • Rebalance the tax code by enacting an excise tax on capital gains at a rate of 9.9 percent on profits from the sale of stocks, bonds, and other financial assets of more than $25,000 (or $50,000 for couples). Washington is giving away a $2.8 billion capital gains tax break to the wealthiest Washingtonians. While 41 other states have this common-sense tax, Washington gives the wealthy a break on huge profits they receive simply from moving their wealth around. Almost 90 percent of this capital gains tax would be collected from the richest 1 percent of Washingtonians. Gains from the sale of a primary home, retirement accounts, college savings plans, and other common investments would be excluded from the tax. 
  • Lift up working families by funding the Working Families Tax Rebate (WFTR). Based on the federal Earned Income Tax Credit (EITC), this rebate is a smart fiscal policy to help struggling families make ends meet. The EITC is one of the most powerful federal anti-poverty tools on the books. Including the WFTR in the Accountable Washington proposal keeps taxes from taking too big a bite out of family budgets for the lowest-income Washingtonians. 
  • Clean out 21 wasteful tax breaks that divert money out of classrooms and into the hands of special interests. To be clear, not all of Washington’s 700 tax breaks are bad policy, but many are outdated and no longer serve their original purpose. And others are simply giveaways to the powerful interests that finagled them into the tax code in the first place. Everybody benefits from excellent schools, clean air and water, safe roads, and accessible health care, so everybody should pitch in and pay their share. 

Our lawmakers have an historic opportunity to make some long-awaited repairs to our broken tax code, not only to provide a world-class education for Washington’s 1.6 million kids, but also to serve their parents, their teachers, their neighbors, and their entire communities. We believe they can do that through Accountable Washington. 

Check out this fact sheet on the proposal for more details.

Governor Proposes Bold Plan to Invest in Kids, Clean Up Tax Code

By Andy Nicholas, associate director of fiscal policy, and Kelli Smith, policy analyst
Great public schools are not only the key to providing Washington’s kids with an opportunity for a bright future; they are also the foundations of a prosperous state. Governor Inslee’s revenue proposal offers a clear vision of how to fulfill the Supreme Court’s McCleary school funding mandate in a way that builds solid economic groundwork for generations to come.

Inslee’s bold proposal would boost investments in schools by $3.9 billion in the coming 2017-2019 state budget. This proposal makes the right choice: to prioritize investing in Washington’s children now in order to strengthen our state’s communities and economy in the future.

Investing in Great Schools 

With regard to K-12 public schools, the proposal would not only finish the job on McCleary, but it would also make additional investments in creating world-class schools. For example, his plan aims to:

  • Invest in educators ($2.7 billion): The governor’s budget includes funding to provide competitive wages to recruit and retain teachers, administrators, and classified staff – which is the most significant item that remains to be funded under McCleary. The plan will bring beginning teacher and staff pay up over the next two school years. It creates a new salary allocation model that will compensate teachers and staff not just for years of experience and degrees earned, but also for meeting professional development goals. The budget also seeks to provide teachers with opportunities for training, mentoring, and career advancement as well as with improved health benefits. Further, it will invest in training opportunities to recruit more teachers who represent communities that are often underrepresented, in particular bilingual teachers.
  • Close the opportunity gap ($867 million): The governor’s proposal would take steps to ensure all kids have equal opportunities to thrive, including nearly half a billion dollars to staff new, smaller kindergarten through third-grade classrooms. Plus it includes targeted investments in social and emotional health supports for students, a learning assistance program that helps struggling students from families with low incomes, and individualized support for foster care youth. 

Making Progress Toward Cleaning Up the Tax Code 

To generate the additional resources needed to build a brighter future for all Washingtonians, Inslee proposes important steps toward cleaning up and rebalancing the state’s upside-down tax code – a tax code in which the people with the lowest incomes pay seven times more in taxes as a share of personal income than the richest 1 percent. These steps include:

  • Enacting a tax on high-end capital gains ($821 million): Capital gains, which are profits from the sale of corporate stocks and bonds and other financial assets, would be subject to a 7.9 percent tax. The first $25,000 ($50,000 for a married couple) in capital gains would be exempt from taxation. As we’ve written about extensively, capital gains are more heavily concentrated among the very richest households – which means the tax would almost exclusively affect only the richest 2 percent of Washingtonians. 
  • Eliminating six wasteful tax breaks ($320 million): The proposal would eliminate a sales tax exemption for cars valued at more than $10,000 when traded in to a dealership. (Only the portion valued at more than $10,000 would be subject to the tax.) A Real Estate Excise Tax exemption claimed by banks on properties sold at foreclosure would be eliminated. The sales tax would be extended to purchases of bottled water. (Bottled water sold to people who do not have access to potable water would remain exempt.) A sales tax exemption claimed by Oregonians and residents of other states or countries with low (or no) sales tax would be converted to a refund program in which individuals would have to apply for the exemption. A sales tax exemption claimed by oil refineries on fuel used to power their operations would be repealed. The business and occupation (B&O) tax would be applied to certain out-of-state retailers that avoid collecting sales taxes by exploiting a loophole in federal law. 
  • Resetting business tax rates on personal and professional services ($2.3 billion): In the mid-1990s, personal and professional services – such as cosmetic services, financial advice, music instruction, attorney services, and business consulting – were subject to a B&O tax rate of 2.5 percent. Policymakers have since reduced the rate to 1.5 percent, although it was briefly boosted to 1.8 percent during the Recession. Inslee would restore the rate to 2.5 percent, but would expand a tax credit for small businesses and raise the minimum amount of business income required to file B&O taxes to $100,000 per year. 
  • Enacting a new tax on carbon pollution ($1.1 billion): Carbon emissions – the major cause of global warming – from fossil fuel distributors and refineries, power companies, and energy intensive manufacturers would be subject to a new $25 per ton tax. About half of the revenue would be dedicated to schools; the other half would go to investments in clean energy, water infrastructure, transportation, and efforts to reduce costs to businesses and households with lower incomes.
  • Reducing property taxes for three-fourths of households and businesses statewide: About $250 million of the additional state tax resources from other parts of the governor’s proposal would be used to reduce local school district property taxes. Under the plan, residents living in 119 school districts (those with significant local property tax levies) would see their property taxes reduced. Even with these reductions, all school districts would receive significant overall increases in education funding. 

What Else Needs to Be Done 

While Inslee’s revenue reforms would make a dramatic step toward a better future for all Washingtonians, the governor and policymakers should also consider the following reforms to make even greater progress toward a more fair and sustainable state tax code: 

  • Create a more equitable and adequate property tax system: A law that arbitrarily restricts property tax revenue growth to 1 percent per year must be eliminated. In the current year, the result of this law is that more than $1.6 billion in resources that would otherwise be used to fund schools is being left on the table. The governor and policymakers should also consider a long overdue increase in the state property tax levy paired with new rebates to offset costs for middle- and lower-income homeowners and renters.
  • Fund the Working Families Tax Rebate (WFTR): Fully funding the WFTR, a Washington state version of the federal Earned Income Tax Credit, would reduce taxes for more than 400,000 hardworking families in Washington state. Doing so would also help alleviate the higher fuel and energy bills these households would experience under the proposed carbon tax. 
  • Apply a higher rate to the capital gains tax: Given the many investments needed to create a just and prosperous state, policymakers should consider generating more resources from the capital gains tax. Applying a rate of 9.9 percent – the highest rate applied to capital gains in Oregon – or higher would generate hundreds of millions of dollars in additional resources for schools and other priorities. 

We applaud the governor’s investments toward creating excellent schools that benefit our kids and thereby strengthen the future of our state for all of us. This proposal makes the kind of investments necessary to ensure that our kids are taught by qualified and engaged educators and that kids who need the most help have access to supports in and out of the classroom. The plan also prioritizes thriving communities by cleaning up the tax code and getting rid of wasteful tax breaks. When we invest in the foundations that benefit us all, we can help to create a better Washington.

Stay tuned for additional analysis about how the governor’s budget proposal as a whole would impact our communities. 

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