In 2021, Washington’s legislature took a big step toward addressing our most unfair-in-the-nation tax code by passing a tax on the capital gains of the very wealthy. SB 5096 established a 7% tax on extraordinary profits exceeding $250,000 per year from the sales of assets like stocks and bonds. When it goes into effect in 2023, it will raise $500 million each year for much-needed investments in chronically underfunded services, including childcare, early learning, and basic education.
Conservative challengers, including the Freedom Foundation and a handful of wealthy individuals, filed suit against the new tax almost immediately. The case was first heard in the plaintiff’s hand-picked court in Douglas County on February 4th. This week, Judge Brian Huber ruled the tax unconstitutional based on State Supreme Court precedents from the 1930s, and the fact that a trial court judge must apply Washington State Supreme Court rulings. Washington’s Attorney General Bob Ferguson is defending the capital gains tax and will seek expedited review by the State Supreme Court, as it is the only body that can overturn its past decisions.
If ultimately upheld, only the top 0.1% wealthiest Washingtonians (1 out of every 1000 people in our state) will pay the capital gains tax. Legislators intentionally targeted the kinds of assets held by the wealthiest when they passed SB 5096. The bill exempts profits from the sale of assets by middle-income working families, including 401k and similar retirement accounts, homes, farmlands, livestock, and timberlands.
Revenues from the new tax could be a gamechanger for children, families, and communities across our state. The regressive tax code in Washington means our legislature relies on the sales tax for 50% of state operating funds. This over-reliance on the sales tax results in a structural deficit that has underfunded basic services and programs for decades. In its 2012 McCleary ruling, the Washington State Supreme Court found that the state was not meeting its constitutional “paramount duty” to amply fund public schools for Washington’s 1.1 million children. Despite increasing K-12 funding in response to McCleary, our public schools still lack adequate state funding for the actual costs of special education, school nurses and counselors, transportation, and other necessities for equitable access to education. Many of these public education investments are legally required by federal and state law and are moral imperatives. Moreover, the pandemic’s challenges mean it takes more resources, not less, to deliver an excellent public education to all students.
In addition to public school needs, Washington’s child care system remains woefully underfunded and unable to meet the needs of young children, working parents, and their employers. The Fair Start for Kids Act, passed in 2021, established strong goals for making childcare affordable for parents and providing fair compensation for child care providers and workers. Without the capital gains tax, the state won’t have the resources to meet these goals.
The pandemic has laid bare the fragility of many of our systems and made inequality worse. The state’s reliance on regressive taxes perpetuates inequality and impedes a strong economic recovery, and the people know it. In poll after poll, Washingtonians support change, including moving forward with the capital gains tax (see: King 5/Survey USA, Topos, GBAO, PPP, GBAO). All communities will see the benefits of robust investments in childcare and public education. Money raised from the capital gains tax will ensure child care providers make a living wage, that public schools can afford needed repairs to keep kids safe, and that all public school students receive a high-quality education. Allies from Invest in Washington Now and the Washington Budget and Policy Center are leading the charge to defend the capital gains bill and we will be following their updates on this important fight to defend progressive revenue.
Washington is in dire need of change – it is time to rethink how we invest in communities and our collective future, so we no longer balance budgets on the backs of working people. Defending the capital gains tax is the first step. But as we look ahead to the future of our state, we must go further, leverage the work of the Tax Structure Workgroup, and holistically reform our tax code. Let’s finally ask the wealthy to pay their fair share, now and into the future, and amply fund the public services and programs our people need to thrive. When we invest together, we can make Washington a great place to live for everyone.
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