November 19, 2011 in City

No capital-gains tax? We’re at a loss to explain that

By The Spokesman-Review

Here’s one for St. Jude, the patron saint of lost causes: Why don’t we tax capital gains to help balance the bleeding Washington state budget?

Oh, I know, literally, why we don’t: Because the state’s political atmosphere, a combination of a Republican minority and Democratic timidity, have produced the conventional wisdom that only an all-cuts approach is feasible. It’s horribly sad, it really is. But it’s all we can do. It’s just a damn shame, the governor says. These cuts will have dire repercussions for our citizens.

If only there were something we could do. There is, of course, something we could do. There are many somethings we could do – though we almost certainly will not do any of them. But as we slide toward simply accepting the all-cuts narrative as irrevocable, as permanent, as just the way it is, maybe we ought to at least allow that there is something else we could do, if we had the will.

We could tax capital gains.

Capital gains are profits on the stock market, mainly. That is the portion of the economy that has not sucked in the last couple of years, and we in Washington do not tax the winnings in this particular casino at all. Most states do. Business-friendly Idaho does. The federal government does. If we decided to join them, and let the first $10,000 in capital gains go untaxed and levied 5 percent on everything above that, the state would bring in a half-billion dollars a year in revenues.

This is, roughly, the proposal of the Washington Budget & Policy Center, which is putting forth the idea as a way of bringing in more revenue, stabilizing the budget going forward, and offering a chance to rebalance the tax burden. Andy Nicholas, a policy analyst with the center, says there’s reason to believe the idea might have some support, as lawmakers again prepare to wrestle with billions in budget-cutting and facing the long-term instability of relying heavily on sales tax.

This tax would have the advantage of not affecting the vast majority of Washingtonians. Ninety-seven percent of us, according to the center, do not gain such capital in a given year, and this would target the remainder. You know, the rich. It seems like a modest enough thing to ask, given the boom times in capital gains – a millionaire’s taxes would increase by nine-tenths of 1 percent.

Figure out the federal tax write-off, and it’s less than that, Nicholas said.

Tell you what: Just to show solidarity, I’ll support raising my own taxes by less than nine-tenths of 1 percent, too. Since I’m a little shy of the millionaire mark.

Or, as long as we’re being absolutely beyond crazy, tax capital gains at 10 percent and raise the sales tax by a penny.

If we did that, we’d raise about $3 billion in a biennium.

That’s more than the current budget shortfall – the $2 billion the state Legislature will convene to carve away in another couple of months.

To be clear, no capital-gains proposal could be put in place to handle the immediate shortfall, even if the Legislature were to vote one in or if it were put on a statewide ballot and approved by voters. We could, of course, raise a little money through the sales tax or by closing a loophole or two, but let’s not hold our breath. But the capital-gains tax sounds sensible as a way to stabilize the budget and shift some of the burden away from the poor and middle class – who are disproportionately hit by a sales tax – and toward high-end, non-paycheck income.

Nicholas is optimistic that something like this might work. I wish I were, too, but all I hear from politicians is a drone about the reality of the situation. The governor’s budget proposal outlines page after page of cuts and not one word about new revenue.

You don’t raise taxes in a recession. Right? Doesn’t everyone know that? In a recession, what you do is kick 35,000 people off the Basic Health plan. In a recession, you cut university funding by another 15 percent. In a recession, you scale back on supervision of paroled criminals. You stop giving money to property-poor school districts. You cut social workers, eliminate domestic violence programs, stop subsidizing child care, shorten welfare time limits, suspend Medicaid drug benefits and stop covering health care costs for 134,000 children who are almost, but not quite, poor enough.

But you never, for a second, consider raising a millionaire’s taxes by less than nine-tenths of 1 percent.

Will this continue to be our value system here in Washington? Whatever its chances in Olympia, the capital-gains tax is worth a look – if only to pause and reconsider in the headlong rush to declare it impossible.

Shawn Vestal can be reached at (509) 459-5431 or Follow him on Twitter at @vestal13.

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