Mighty big assumptions that capital gains income tax would be offset

Ostensibly, lawmakers in Olympia are arguing over education funding. The debate over how to finally and fully fund the state’s McCleary obligations is seemingly about schools.

In reality, education funding is where legislators have the most agreement, broadly speaking. They might be arguing about the how, but they’re not far apart about the how much.

No, the fight in Olympia this year is as much about the rest of state government as it is about schools. It’s the usual fight between Democrats and Republicans about the size of state government.

Gov. Inslee proposed a carbon tax, an income tax on capital gains, and a B&O tax hike on service businesses. State Senate Republicans actually advanced those measures to see how enthusiastic Senate Democrats are to vote on them (not very).

House Democrats, meanwhile, released a spending plan without the taxes to pay for it, which is about as craven as it sounds.

A new (old) wrinkle
Your extra-sensory skepticism should be roused anytime an all-new tax is promised to be “a wash.” We’ve heard that one before. Seattle Times columnist Brier Dudley offered up that line, saying a new state capital gains income tax might just even out.

How could that be? Well, Dudley says, President Trump and Speaker Ryan have talked about lowering federal capital gains taxes, and if Republicans repealed Obamacare, that law’s capital gains tax could go away too.

That’s making some mighty big assumptions. Even if both of those federal changes end up happening, they won’t be happening quickly. Dudley is talking about passing these state taxes now, on the hope that Congress actually pushes these changes through and Trump signs them – the best-laid plans of mice and men.

Keep in mind, there are unanswered legal questions surrounding a state capital gains income tax. And should we always offset federal tax cuts with new state taxes to grow state government?

Washington’s competitiveness is a real concern
As Matt McIlwain points out in the Times, state tax revenues are growing robustly. Taxpayers are right to be skeptical that the state’s needs can’t be met by revenue growth of this magnitude.

There is also the matter of our state’s competitiveness, which McIlwain rightly highlights. These types of arguments are often met with eyerolls from the professional interest groups that count on government funds. For businesspeople whose ventures have fueled the jump in state tax revenues, they’re important.

Whether or not a business chooses to set up in Washington is influenced by our lack of a state income tax, of both the regular and capital gains variety. Don’t believe me? Just ask Gov. Inslee’s Commerce Department.
-Rob McKenna

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Rob McKenna
Rob served two terms as Washington’s Attorney General, from 2005 to 2013. He successfully argued three cases before the U.S. Supreme Court and negotiated three of the largest consumer financial protection settlements in national history, all involving mortgage lending and servicing. He is a recognized leader in the development of consumer protections on the internet, in data protection and privacy regulation.