Schools, Colleges Would Get a Much-Needed Boost From Plan to Tax High-End Capital Gains

As policymakers struggle to fund education and other public priorities, a bill introduced yesterday in the State Senate would provide much-needed resources to our schools by creating a tax on high-end investments and other capital gains that could generate more than $1 billion in every two-year budget cycle.

Senate Bill 5738 would ask voters to approve a new tax on profits from sales of stocks, bonds, vacation homes, art, and other capital gains earned by the wealthiest 2 percent of Washingtonians. The question would be on the November 2013 ballot. In the meantime, the bill would generate other new resources for education by temporarily extending small surtaxes on large beer companies (breweries and distributors) and the service industry that are set to expire in June.

This is a common sense solution to help close the sizeable gap between the amount of revenue the state is taking in and what is required to meet basic public needs. The problem has been greatly compounded this legislative session, as lawmakers must comply with the mandate to fully fund basic education under the state Supreme Court’s McCleary decision.

SB 5738 would invest about $1.3 billion every biennium in essential school improvements, ranging from expanded pre-kindergarten education  to greater tuition support for college students (see graph below). The measure would also establish performance goals and benchmarks to ensure children make progress under these reforms and are learning what they need to so they can thrive at every stage of life and help build a stronger Washington economy. 

As the graph shows, the legislation would fund:

• $730 million in increased investments in education from pre-school to college.
• $220 million to reduce class sizes.
• $175 million to prevent further tuition increases at 4-year colleges and community and technical colleges.
• $89 million for all-day kindergarten at every school.
• $55 million for expanded pre-kindergarten learning opportunities.
• $6 million to help kids at risk of dropping out stay in school.

The 5 percent tax on capital gains voters would be asked to approve would apply to profits from the sale of corporate stocks, bonds, and other high-end financial assets above $20,000 per year for a married couple. Gains from retirement accounts would be exempt along with those on the sale of farmland, livestock, and timber. Furthermore, the vast majority of ordinary home sales would be exempt under this proposal. Only vacation homes and the most expensive primary residences would be subject to any additional taxes.

The legislation would also extend for another two years a 50-cents-per-gallon increase in the beer excise tax and a 0.3 percentage point business tax increase applied to law firms, accounting firms, hair and nail salons, and  other services.

The Budget & Policy Center has done extensive research on the advantages of taxing capital gains. Such profits are heavily concentrated among the richest few Washingtonians, so 98 percent of households would pay no additional taxes under the proposal. In addition, capital gains are rapidly growing, meaning they would help Washington state create a more stable and adequate revenue system in the long run.

For more information about the capital gains tax, check out A Capital Reform: Using Capital Gains to Fuel Job Creation and Economic Prosperity in Washington state and Top 10 Graphs About Capital Gains.

Our recent policy brief, A Paramount Duty: Funding Education for McCleary and Beyond provides more information about these and other important education reforms.

More analysis to come. Stay tuned to schmudget.