Revenue Forecast Up Slightly; Problem Not Solved

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.