Capital Gains Tax

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Thank you.

After years of trying in the legislature, it was a two year court battle that finally exposed Washington taxpayers to a capital gains tax on anything over $250,000.

What's to worry about, though?

It's probably not going to affect you, right?

Well, that depends on whether you believe it's a one off tax hike on a few or the precursor to ever lowering exemption rates or an even broader statewide income tax that voters have rejected ten times.

That's part of the discussion Next on Northwest down under, the new tax takes a 7% cut on the sale of stocks, bonds and other assets in excess of $250,000.

It stands to raise about $500 million a year for early childhood education.

Farms, real estate and retirement accounts are exempt for now, so it only has the potential to touch about 1% of the state's residents.

That includes people like Ken Fisher, the CEO, billionaire of Fisher Investments.

He ran away from California in 2008, moving his headquarters of about 1800 people to Camas, Washington, in protest of the new tax.

He's now fleeing again, this time to Texas.

That's the thing about taxes that start on the rich.

The rich can run away, but at some point everybody else is left behind, possibly being asked to make up for the lost revenues new programs depend upon.

Even though the court upheld the capital gains tax, it refused to reexamine the constitutionality of an income tax.

So for now, the income tax isn't in play, even though it certainly is in the discussion.

Joining us now to talk about the implications of the new tax are Paul Guppy and David Bowes, both from the conservative leaning Washington Policy Center.

Paul and David, thanks so much for coming in Northwest now for a conversation about the capital gains tax.

It's a new tax here in Washington state.

I think there are a lot of questions and concerns about it, what it means, what the implications for the future are.

Paul, I want to start with you.

Go ahead and lay out a little bit the mission of the Washington Policy Center and how that relates to your ongoing discussions over the years about the threat of an income tax.

Now the court said, hey, we're not going to evaluate this as an income tax.

That's off the table.

Don't worry.

Are you sleeping well at night?

Yeah, Not with the way this court just operated.

So overall, Washington Policy Center is a nonprofit, independent research education organization.

We're based in Washington state.

We have members all across the state.

We're supported entirely by voluntary donations.

And the reason that's important is because we can take an independent look at what the courts do, what the governor does, what the legislature does.

And to your point about what the court did, we can talk about the details of it, but they basically played a semantic word game between the phrase excise tax and income tax, because as the Democrats who govern our state and the courts know, an income tax is not legal under our Constitution.

That is a graduated income tax.

The court got around that by labeling it an excise tax.

So we see that as a word game, which I think undermines some of the public trust in the court.

But that's the outcome that they wanted to get and that's what they did.

Actually, it was seven of the nine justices voted that way.

David, I was gonna talk to you a little bit about that language piece, too, in terms of of selling that.

One of the pieces of language that's frequently used, Paul, address the income and the excise tax piece of that but is also that Washington state's a very regressive state when it comes to taxation.

Nobody wants to hear that.

Regressive.

What do you mean?

We've got to get hip, don't we?

What is the regressive tax?

What does regressive taxation mean?

And is this a logical solution to it?

Well, what what the income tax advocates say is that we need these extra taxes in order to reduce the burden on people who are lower income in Washington State because as a proportion of their income, they're paying more with a sales tax than, say, a rich person would.

But what's interesting is, you know, if I was on a hike and you and I both had backpacks on, you know, and yours was lighter than mine, and somebody came on said, look, I want to make Dave, I want to make your backpack lighter.

I'm going to add weight to yours.

You know, you'd say, well, you're not you're not reducing the burden at all.

And that's essentially the approach that they're taking with these taxes.

The Washington Policy Center has advocated a cut to the state sales tax, which would disproportion only impact those of lower income and help them benefit them to keep more of their money.

Wait a minute.

You mean reduce revenues?

Well, hang on a minute.

You know, you know who your audience is, right?

I mean, we reduce the growth of future revenue.

That's right.

Yeah.

Actually, you could cut the state sales tax significantly and you'd still have to have more money in Washington State.

Our revenue has grown.

What is 150, 150% over 12 years?

We have, what, a 15% increase in population over that time.

Other states, while Washington State grew by what, at the end of the COVID pandemic, it was 39% in terms of revenue growth.

Other states average was about 15%.

I mean, all this blurry number stuff.

But what it means is Washington could have made dramatic cuts to allow people of lower income to have a lesser tax burden.

They didn't.

The the overwhelming focus is on adding tax burdens to other people.

Because a strange paradox, though, if we're doing so well, why hasn't this hurt our competitiveness?

Why are people still running to Western Washington and hoping to start business?

I can't figure it out, but I mean, to start businesses and to do things.

Paul on the revenue is, you know, the receipts are growing.

Is this what does this say about our competitiveness?

Will we ever really kill the golden goose?

Well, that's what we worry about.

So people work hard in the state and revenues have been good and that's positive for the state.

But people are also leaving the state.

So Fisher Investments, for example, announced that they were moving from Camas, Washington to Texas, and that was directly related to the income tax decision that the court had.

But overall, I think there's a short term concern in Olympia that plenty of money is coming in this is great.

We have they had a big surplus last year.

They spent it all.

They've added several new taxes.

But today's point, they haven't done anything to provide tax relief.

So what if we want greater tax justice, if we want to reduce the regressive arrow of our tax system?

Adding an income tax doesn't do anything to resolve that.

And instead cutting the property tax.

Cutting the sales tax would directly impact working people lower income.

And you could and you could target that by income, right?

You could take a property tax or a sales tax on gas, looked at taxes or whatever it might be, and target that to lower income levels.

Sure.

But it's targeted that way anyway, because lower income people spend a larger proportion of their income on day to day necessities.

So we're not really so concerned about the rich, the billionaires, They tend to take care of themselves.

What we're concerned about are the millions of working people across the state who are hit with sales tax, high property taxes, high housing costs every single day.

So whenever I hear the argument about regressive, I'm like, Well, why don't you cut a regressive tax if that's what Olympia wants to do?

Dave Again, that's a that's another hard sell rhetorically.

And I keep coming back to you for the for the for the wordsmithing part of this to some degree, because you are the marketing and communications guy with the Washington Policy Center trying to trying to convince, I guess, lawmakers and people who want to build programs, create programs and increase the presence of the state in our lives that the solution to regressive city is reducing taxes.

Wow.

Good luck with that.

You know, that's unique to Washington as well.

Our government reformed director Jason Mercier surveyed other states and looked and even blue states like California, like Hawaii, even states that are run by Democrats are finding ways to cut the tax burden for people in recognition of the trauma of the of the pandemic and recognition of inflation.

Washington State's a bit unique in this thinking that, gosh, no matter how much revenue comes in, we've got to keep it for ourselves.

I mean, we have billions of of surplus revenue, tax revenue coming in, revenue that they weren't expecting that that's come in.

And instead of returning some of that to the people and reducing the the burden on the poorest among us, they just continue to find new ways to spend it.

Politically, do you think they'll ever be an appetite for that?

Is that realistic in this state?

I think it's a major winner.

And the reason is because the again, the Democrats who pushed the income tax, they went through the courts.

And if they had gone to the ballot box, oh, yeah, an income tax would have been voted down.

So that's just democracy.

So what we see is that they did an end run around self-government and went to the least democratic part of our government system, the courts.

Seven judges voted this hour, confirmed, I should say, this income tax bill into place.

And the thing about cutting regressive taxes is that's a way to build trust with the public.

So public trust in our leaders is at record lows.

And if state leaders just signal to the public, we're willing to reduce your tax burden, provide some tax relief, has 49 other states have done.

And that's a starting point for getting people engaged with reforming the tax system or improving the way we raise money.

And let me let me say one thing to that, which is we know that there's an appetite for for this kind of tax relief because and we know that there's an appetite to get rid of any hint of an income tax because they put emergency clauses on the legislation.

The legislation to make sure that the people have the hardest time possible to have a direct vote on it.

Right.

So, you know, was there an emergency with with with revenue?

You know, more than 150% increase in revenue over the over the past 12 years?

Was there an emergency for this revenue?

No one actually believes that that was specifically there to keep it off the ballot so that the people couldn't say no to an income tax.

And and I'm guessing that if if a ballot measure showed, hey, let's use some of the surplus tax revenue and return it to you in the form of a lower sales tax, I'm I am very certain of the outcome of of what that would be when it's burning a hole in your pocket.

It is an emergency.

Just saying no, that's good stomach.

Here's a philosophical question for you.

This really bothers me when I listen to some progressive voices talk about this.

They talk about all these all these rats who own stocks and bonds need to be taxed, the rich folks who own stocks and bonds.

I find that so corrosive because what it implies is that stocks and bonds and investing and being having a being an owner in America and providing capital to working people and providing jobs.

Is it for you if you're middle or lower class, you shouldn't be looking at fractional ownership of a share of anything or buying a share in Apple if you own their phone.

I think that is so damaging that that messaging.

Talk a little bit about that.

And I almost feel again, like some of the progressive agenda in the state feels like investment gains are ill gotten.

Sure.

So that again, we're analysts.

So that immediately raises the question of what is public tax public policy for?

Is it to raise revenue for essential services that we all benefit from or to pick up on?

Your question, is it to punish people that you don't like?

So being bait, a tax policy that's based on envy and, you know, greed for the government, they talk about, you know, people who invest and build businesses as being greedy in the private sector.

But I've worked in public budgeting and finance my whole career, and I've never seen the amount agreed that there is on an Appropriations committee, a Ways and Means Committee.

I mean, when lawmakers vote for taxes, they want to control the money.

Right.

And they're looking at a larger tax on real estate sales, the excise tax, they're an overall wealth tax.

A lot of other things are on the table.

The the counterargument to that, David, of course, is, yes, let's not resent the rich.

You know, let's understand how markets work.

Let's understand what capital gains really are.

The earnings you receive from taking the risk of investing.

But look at the disparity in wealth.

My gosh, in this country, I mean, half what half of 1% controls all the wealth in this country.

How do you answer that?

And isn't this to some degree an attempt at a remedy of of of that problem, of disparity?

Well, no, because they're not giving people their money back in a in a sales tax cut.

I mean, you know, there's there's there's federal issues.

There were State Policy Center.

So we'll focused on Washington state.

You know, there are ways to give people more of their more of their money back.

And we've seen that as far as other people having more money, if if somebody takes a risk and creates a new product or they create an Amazon, so to speak, and they make all kinds of money, that didn't hurt me.

I mean, one person gaining doesn't hurt me.

We're not in a zero sum game where, you know, in order for someone else to succeed, they have to take money away from me.

They might be generating new wealth and new opportunities.

So it's like your backpack analogy, though.

Let's let's not put a bullet in his leg.

Let's give you give you some more resources.

In terms of a rebate to help you.

Right.

Right.

I mean, it hasn't added weight to my backpack, so to speak.

It's that person's found a new way.

Maybe they developed a better backpack, you know, state budget.

I think it's correct me if I'm wrong, Paul.

I know you know this, right?

The back here as a fact, I think we're $70 billion now per biennium, thereabouts, plus or minus.

So right now it's around 64, 65 billion going to 70 billion is a proposal for the next bike.

And I remember that number because I was like, wow, I kind of oh, wow.

Moment.

You know, we're talking about raising the real estate seller's tax.

Another thing, too, as proposals.

What do you think the future is of all taxation of the state?

You gestured at this and I guess the other side argues there's an increasing appetite for this.

If you really look at polling and look at some of the research that's been done about this, there is and there is a more of an acceptance of real estate or of of income taxes, more acceptance of this kind of things.

Do you see that as being true or are we looking at the rural, urban, suburban divide here?

What how do we see through that research?

Sure.

So I again, we're familiar with polling as well.

So it depends on how you ask the question.

And often people who are advocating for higher taxes and more money for the government pair that with some very attractive, feel good type program that they are promising in the future.

So in the same poll right.

So would you pay more money for great parks?

Would you pay more money for better schools?

And of course, people are going to tend to say yes, but in the real world, there's actually no link between those two.

Money comes into the Treasury and lawmakers decide every two years how they want to spend it.

Our point of view is what level of revenue is needed by the government to provide services that serve the people of our state.

That's our starting point.

It's not about just getting people's money or redressing inequalities in society.

And by the way, if advocates are in favor of that, then they should just say that we want to distribute money by taking using government power to take money from these people and hand it out to these other people.

So European countries have this debate and we can have that as well.

But instead, the debate, the argument we hear is that the government, regardless of what your family budget is, it's the state that's short on money.

And boy, we sure need more.

Yeah.

And that's and I think that's why people's trust in government goes down when the last 15 seconds.

Yeah.

And Washington Policy Center obtained emails through public records request showing you know for some income tax advocates they were saying, hey, we want this court case so that we can establish this this income tax.

You know, it wasn't the hey, we need to find a way to get this before the voters, that they know that the support is not there.

I did get to it because we're out of time.

But your website is WPC dot org Washington policy dot org Washington policy that org because I also we didn't get to farms but I want folks to read a little bit about family farms to yourself.

You bet guys.

Thank you.

Great Thank you.

A group called Invest in Washington Now is a major proponent of the capital gains tax, mostly because it's a step away from one of the country's most regressive tax systems.

Regressive taxation means the poor and middle class pay the same rate on sales and other taxes, meaning a larger share of their incomes are eaten by taxes, while the rich wind up paying a very small percentage of their incomes.

Treasurer Mackley is the executive director of Invest in Washington Now.

Treasurer, thanks so much for coming to Northwest now.

I want to start with you, giving us a little education when it comes to the capital gains tax.

It was discussed in the context of Washington State having one of the most regressive tax structures in the United States.

Explain to folks what a regressive tax structure is and how and why it lays the groundwork for something like a capital gains tax in your mind?

Well, the regressive tax structure is where those with the least pay the most.

So here in Washington State, what we see is low income folks are those at the very bottom end of the income scale, oftentimes pay 13, 18% more in taxes than those at the very top.

When we look at the very wealthiest few Washingtonians, they're oftentimes paying 3% or less of their income in taxes.

So that's what it means when we say we have a regressive tax code.

It means that those with the least are paying the most in taxes.

So the gas tax that you pay, that the rich guy pays for his tank of gas and the gas tax that the poor folk pay on their gas tax, it's the same tax, but it's 1/1000 of his income, but 1/10 of his income or whatever, or one, one fifth or whatever.

So that's the regressive nature of it.

Lands it lands on a certain population.

Harder.

That's correct, yes.

What are some other examples of that?

The state that I just want people to be able to touch bases with, what some good examples of that might be.

Well, in Washington State, most of our taxes come from sales tax, property taxes and business taxes.

And so when you look at sales tax, just like your gas tax example, you know, low income folks still have to buy food.

They've got to pay buy clothes.

They have all the same expenses that folks at the very top of the income have as well.

The fact of the matter is, is that in terms of paying taxes and the taxes they pay to the state, they're paying a far greater percentage of their income than the very wealthy.

So the wealthy aren't paying what they truly owe in taxes.

And Nick Hanauer makes that point.

He's a wealthy entrepreneur and philanthropist here in the Seattle area.

He says, You know, I buy the same number of pants that the next guy does.

It's not like I need 10,000 pair of pants.

Exactly.

Yeah.

Philosophical question for you, because I want you to be able to address some of the pushback on this.

People work, sacrifice, invest, take risks, cry at night over the business that may or may not make it.

And, you know, the people aren't around for those parts of their of their gains, their around for the capital gains there are around to get a piece of the action when things work out well.

Is there a sense in the in the progressive piece of this that for some reason capital gains are ill gotten in some way?

You know, that's a great question.

And when we were looking at structuring the capital gains tax and the legislation, you know, the legislature and advocates, this was ten years in the making.

And we took a look at a number of different factors because we wanted to make sure that this tax wasn't going to make our regressive tax problem worse.

We wanted to make sure that this tax was not going to hit the average Washingtonian.

So there's a number of exemptions that were built in.

There's exemptions for the sale of small business.

There's exemptions for retirement.

There's exemptions for real estate.

There's a number of different exemptions.

You only will pay this tax when you receive over $250,000 in profit.

So the fact of the matter is, you know, we have a very small percentage of Washingtonians who are ever going to pay this tax.

And most of those folks know that they've done really well in Washington, and they want to do well by Washington because they are also interested in investing in their communities.

Here's the next one for you.

And I'm sure you've heard this.

You're at 250,000 today, next year.

No, it's 50,000 or 25,000.

This thing is going to work its way down the food chain when the rich pick up and leave, like Ken Fisher.

He evacuates the state of Washington.

It's going to be me that's going to have to fund these programs that have been started relying on this capital gains tax.

Talk about that.

Well, that's a lot of fear mongering.

First off, and let's start with Ken Fisher, because Ken Fisher actually moved from Washington state two years ago, far before this capital gains tax was even passed.

So that's just revisionist history.

Secondly, the notion that wealthy folks are going to leave has been a theory that's been thoroughly debunked.

People choose where they live based off of the communities, based off of the natural beauty.

Folks live in Washington State.

Wealthy folks live in Washington State for the same reasons that you and I live in Washington State.

Because we have beautiful mountains, we have beautiful rivers, we have great communities and neighborhoods and schools.

That's why they choose to live here.

There is some tortured language in this and legal reasoning where income tax and excise tax are conflated a little bit.

We're the only place in America, or possibly the world where capital gains are not viewed as income.

And we cannot have an income tax in this state, according for now.

I'll ask you about that later.

So are you a little worried about a court challenge on this, about the vulnerability because of some of the tortured language in this not standing up?

Well, this has already been all the way up to the Washington state Supreme Court.

And the Washington state Supreme Court just ruled a few weeks ago with a decisive victory that this is, in fact, an excise tax.

And, you know, this argument reminds me of a conversation I've had with my kid recently.

So I have a seven year old and he was over at a friend's house the other day, came home, and he was all worked up because his friends, he's able to have a lot more screen time than he is, right.

So they get to play a lot more video games.

And he came home and said, Mom, why can't I play this many a better video games?

And I said, Well, you know, in our house, our rules, you know, no shade on the other parents.

But in our house, these are our rules.

And here in Washington state, the Washington state legislature has has broad authority to pass tax legislation.

And then that legislation went before the Washington State Supreme Court, who looked at the Washington state constitution, which are the rules that govern our house in Washington state.

And they said, according to the Washington state constitution and the work that the Washington legislature did, the capital gains tax is an excise tax.

So here in Washington state, it's an excise tax.

And we only get a certain amount of hours to play a video games.

The voters of Washington State do not want an income tax.

That is clear.

Do you want one?

Here's what we've seen year after year after year after year, polls have steadily increased where Washingtonians are just like the rest of Americans want the wealthy to pay what they owe.

Last year, our opponents folks who were trying to roll back the capital gains tax, they tried to put an initiative on the on the ballot.

They started their campaign.

They launched an initiative.

They had to close it within two months because they weren't able to raise the resources or the public support needed to get this on the ballot.

One of the things that that that gives me pause to when I when I read some of the discussion about this is there's a I think, kind of a consistent mistake, I believe that's being made by the left in the sense of they talk about stocks and bonds being for the wealthy, the wealthy people, the stocks and bonds.

I think excluding people mentally in the working classes from the idea that they too can own stocks or bonds, that they can be investors, they can invest, invest.

It is so corrosive.

I really worry about that.

I guess what's your message there when we talk about let's let's whack the rich because they have stocks and bonds.

My my reaction has always, man, that is wrongheaded because the people the rest of the folks need stocks and bonds to to be investors, to be stakeholders.

You know, here's the thing.

I own stocks and bonds.

I'm sure you own stocks and bonds.

Many of us do.

The fact of the matter is, is, you know, that's something that every American should be able to do should they choose.

But the problem that we're dealing with now is that we have such extreme differences between the very wealthy and average folks.

You know, when I was growing up, we didn't have the number of billionaires that we have now.

And here in Washington state, we have more billionaires than many other states.

The thing about the capital gains tax and this is what's interesting, because it only applies to profits over $250,000.

It means that only point 2% of Washingtonians will pay that.

That's about 7000 Washingtonians.

So when we are thinking about addressing our regressive tax code here, where we've had low income folks who are paying far more than their share, this is a way to make sure that the wealthy are coming to the table just like the rest of us, to pay what they owe.

And I can just hear the folks yelling at the television right now.

When you talk about 2/10 of our population that I'm saying for now.

Yeah.

All right, Treasurer, thanks so much.

Great conversation.

And I think some really good insights about some of the some of the thinking behind this, this capital gains tax.

Thank you.

It was great to be here.

Thank you.

Those of us living and working in western Washington might be tempted to think it's the center of the intellectual, political and social universe.

The bottom line.

I have some bad news for you.

My admittedly anecdotal experience is that the vast majority of the people I've interacted with in other parts of the US think Washington is a mysterious territory on the edge of nowhere.

That means our competitiveness is essential and the lack of an income tax may well be one of the increasingly few reasons to ponder moving a family or a business up into the rain, the crowds and the traffic.

I hope this program got you thinking and talking to watch this program again or to share it with others.

Northwest now can be found on the web at kbtc dot org and be sure to follow us on Facebook and Twitter at Northwest.

Now a Streamable podcast at this program is available under the Northwest now tab at KBTC dot org and on Apple podcasts by searching northwest now.

That's going to do it for this edition of Northwest now until next time.

I'm Tom Layson.

Thanks for watching.