In this special bonus episode of WA Possible, April Dickinson, communications specialist at the Washington State Budget and Policy Center, is joined by her colleague Senior Fellow Andy Nicholas to talk about why the capital gains excise tax is awesome for Washington.
In a decisive 7-2 ruling in March 2023, the Washington State Supreme Court upheld the state capital gains excise tax against efforts by self-interested millionaires and billionaires to overturn it. We’re thrilled that the revenue generated by this new tax on the wealthiest Washingtonians will help support kids and families across the state and we are so proud of every person and organization involved over the years for making this victory for tax justice happen.
The effort to pass a capital gains excise tax is part of a larger movement to fix our inequitable, worst in the nation tax code. We’re so excited to talk about what is possible for the people in our state as we’re starting to make progress on making our tax code for work everyone.
Andy Nicholas (he/him) is a senior fellow at the Washington State Budget and Policy Center. He specializes in state budget and tax policy. Since joining the Budget and Policy Center in 2009, he has served on a Legislative Task Force on Tax Preference Reform and has conducted numerous analyses of Washington state’s tax code.
Andy previously worked at the Washington, D.C.-based Center on Budget and Policy Priorities, where he performed extensive research on state fiscal policy. Additionally, Andy taught English in China. He holds a Master of Public Policy from American University’s School of Public Affairs.
[00:00:05] April Dickinson: Welcome to a very special bonus episode of WA Possible, the Washington State Budget and Policy Center's podcast about what is possible for economic justice in Washington state. I'm April Dickinson, communications specialist at the Budget and Policy Center and our senior fellow Andy Nicholas is joining me to talk about why the capital gains excise tax is awesome for Washington.
[00:00:25] As you probably already know, a decisive 7-2 ruling, the Washington State Supreme Court recently upheld the state capital gains excise tax against efforts by self-interested millionaires and billionaires to overturn it. We're thrilled that the revenue generated by this new tax on the wealthiest Washingtonians will help support kids and families across the state and we are so proud of every person and organization involved over the years for making this victory for tax justice happen.
The effort to pass a capital gains excise tax is part of a larger movement to fix our inequitable, worst in the nation tax code. We're so excited to talk about what is possible for the people in our state as we're starting to make progress on making our tax code work for everyone.
[00:01:09] So, Andy, I'm so glad to be talking with you at this truly historic moment. We'll cover the 12-year journey toward the implementation of the capital gains excise tax, more details about the Supreme Court decision, we'll get clear on what the tax is and isn't, and we'll talk about who benefits from the funding that will be generated.
But first, you've been with the Budget and Policy Center since the beginning of the capital gains tax journey and helped draft the initial policy. I just wanted to start by giving you a chance to reflect on everything that's happened over the last 12 years and just, you know, what's this moment like for you and how are you feeling?
[00:01:45] Andy Nicholas: Yeah, thanks, April. It's really great to be here. You know, it's a really gratifying moment when you're seeing our efforts and those of our partners pay off. We're seeing a really meaningful shift in Washington's upside-down tax code in a more equitable and progressive direction. And, you know, we're going to see a lot of big new investment in child care and early learning in our schools.
And as a parent with two young kids, I get - in a very real, tangible way - the challenges of paying for child care and making sure your kids are in a good situation. And, you know, a lot of parents aren't as lucky as I am. 500,000 kids across our state have no access to licensed child care right now. One in five parents in Washington have to turn down a job or a promotion because of concerns about child care and the lack of affordability. You know, it's really expensive. Child care in our state costs more than the annual in-state tuition at the University of Washington. People really don't know that.
[00:02:50] And, of course, child care workers - who are disproportionately women of color - are some of the lowest paid workers in our state, often earning only the minimum wage and yet arguably do some of the most important work we could ever imagine asking of someone, which is caring for our kids.
So yeah, it's a real gratifying moment. You know, the capital gains tax is the major funding source behind the Fair Start for Kids Act, which is a big boost in child care and early learning across the state. And the recent ruling that you referenced in the intro from the state Supreme Court, lopsided majority upholding the tax, secures that funding. It's going to be $500 million per year in new funding for child care, early learning, and schools.
[00:03:34] And, importantly, in years where millionaires and billionaires have like a really good year in the stock market and we get more than $500 million per year, that's all going to go to school construction across the state, which is going to be great for communities across the state, great for our kids, and it's going to create a lot of jobs.
So, yeah, it's exciting and a really gratifying time to be working at the Budget and Policy Center and seeing our efforts, and those of our partners you know, pay off.
[00:04:05] April: So it's been like a 12 year long process, as you mentioned before. What were some of the lessons that you learned along the way?
[00:04:12] Andy: Yeah, well, it takes a long time to build momentum around a policy, especially a progressive tax reform policy. And so, you know, I think the biggest lesson is you just got to keep at it. You do see a lot of folks coming in to, you know, the policy reform world, they have a great idea, but they get discouraged after a couple of years and abandon it. And that's too bad.
And it's understandable. The process does take way too long and there are way too many barriers to getting good things done. But, you know, keep at it is the lesson that I've learned.
And as you mentioned, we started this way back in late 2011. And just want to give a shout out to Mike Mitchell, former WA Possible guest. He was a fellow in our in our organization back then and he worked really closely with me on fleshing out the original concept way back in 2011. And so, yeah, thanks, Mike. Our efforts are paying off.
[00:05:13] You know, and then we just spent many years working with partners, working with lawmakers to refine the policy, continue to improve it, build momentum, explain to people and communities why we think it's a good idea. And yeah, it took over a decade, but that momentum and that work with our partners really paid off.
[00:05:36] April: That's awesome. And, you know, it's very clear that we, you know, you can't make such a huge change to the state's tax code alone, and we definitely didn't do it alone. And so let's just take a quick second to give a shout out to some of those partners that we have worked with. We probably can't fit them all here in this moment, but we'll definitely shout-out as many people as we can in the show notes. But yeah, who are some of those partners that we worked with to make this big change?
[00:06:01] Andy: Yeah, you're absolutely right. This would not have happened - You know, you don't just do a policy brief and then stuff happens and you get a win. It takes a lot of hard work with a lot of people. And so a ton of people joined us in this process and helped us get it across the finish line. The Washington Community Alliance, Equity in Education Coalition, Balance Our Tax Code, Firelands Workers United and Rural People’s Voice, OneAmerica, Washington for Black Lives. I mean, there is a lengthy list of community-based coalitions who really were instrumental in getting this across the finish line.
[00:06:40] April: Awesome.
[00:06:41] Andy: And I also would like to mention that there are a whole lot of very wealthy folks in Washington state who want to do right by their communities, who want to pay what they owe to support the common good. And there were dozens of wealthy individuals who will actually pay this tax, who wrote letters to the governor and to lawmakers, showed up and testified and said, this is a great idea for Washington state. We're happy to do our part. Please enact this tax. And so it was a really broad effort.
[00:07:08] April: That's awesome. So let's be super clear on what the capital gains excise tax actually is. Can you go ahead and describe it to us?
[00:07:16] Andy: Yeah. So it's a 7% excise, or transactional tax on extraordinary profits, those above a quarter million dollars per year, from the sale of financial assets. And that's mostly corporate stocks and bonds. So to make it a bit more concrete, let's say you're a millionaire and you sell a whole bunch of corporate stock and you reap a $400,000 profit from doing so. The way the law is structured is that the first $250,000 in that profit is exempt. So that millionaire is only going to pay [taxes on] $150,000. You know, the portion above $250,000 on their original stock profit.
As I said the tax rate is 7%. So you sort of fast forward all in all that millionaire will wind up keeping $389,500 of their original $400,000 profit. So they're keeping the vast majority of the profit, but they'll pay $10,500 in capital gains excise taxes, which will be channeled to communities to fund child care, early learning, schools. And all of the revenue is dedicated to our state Education Legacy Trust Account, where it will fund those important education priorities.
[00:08:31] April: So who are the people that are going to pay this tax? Like who are the most likely people to pay the tax?
[00:08:36] Andy: Yeah, so as I alluded to, this tax is only going to impact the very wealthiest households. It's somewhere between the wealthiest 0.2% and 0.1%. I've seen different estimates. If we're quibbling over the wealthiest zero point 10th of a percent, then we're pretty confident that this is only going to impact those who have who are very, very wealthy.
In fact, the average annual income of those who would be impacted is $2.2 million. And many of those make much more than that. And the reason why it only affects so few very wealthy households is one, because of that, that $250,000 exemption that I mentioned the first. So very few people are ever going to have stock profits over $250,000 per year. It's a pretty small, rarefied group.
[00:09:26] Second, we worked with partners and lawmakers to ensure that the tax really only applies to those highly concentrated stock profits. So all sales of real estate are exempt from the tax. All assets held in retirement accounts are exempt from the tax. The sale of a family owned small business, exempt. The sale of assets - you know, whole things across the board just to ensure that it's really only those stock profits from the very wealthiest households.
But it's important to understand the extent to which financial assets, corporate stocks and bonds, are concentrated among the very wealthiest households. You know, the wealthiest 1% of households in our state, they control over two thirds, 68% of all capital gains generated here every single year.
[00:10:17] April: So it sounds like the tax was structured very intentionally, so it would only apply to the very wealthiest in our state.
[00:10:24] Andy: That's right.
[00:10:26] April: All right. That sounds good to me. What are some other good reasons to tax extraordinary capital gains in our state?
[00:10:32] Andy: I mean, if you take a step back and look at what's driving this growth and an extreme wealth concentration and inequality in our state and in our nation, it's really corporate stocks and bonds and financial assets that are the major drivers of wealth inequality. And troublingly and especially, it's they're driving the, you know, racial wealth disparities.
In fact, there's a recent paper from the National Bureau of Economic Research which found that capital gains are basically solely responsible for the widening of racialized wealth disparities in our country since the late 1980s. And that's because policies since that era have just greatly benefited wealthy asset owners who are primarily white, instead of workers who are a much more diverse crowd.
[00:11:22] And so that's why we and a lot of community-based organizations across the state, many of which I mentioned earlier, like the Washington Community Alliance, One America, Equity in Education Coalition and others, we put together an amicus brief - or a friend of the court brief - that we sent to the state Supreme Court earlier this year, urging them to uphold the tax, which, as you mentioned, they did.
And that brief really outlined how stock profits and financial assets have been driving racialized wealth inequality and why the state capital gains excise tax is an important step towards, you know, intervening and, you know, reducing those disparities.
[00:12:03] April: And it's just super important to remember how like racism and white supremacy underpins so much of our economic structures, not only in Washington, but also the United States. And it's just great to know that the capital gains excise tax will start to address some of those structural harms.
And if people are interested in learning more, you know, you can check out episode one of WA Possible. Andy mentioned Mike Mitchell, he was part of that episode and he shared with us the connections between racism and the tax code. So you can go back to episode one if you haven't caught it yet.
And in March of this year, the state Supreme Court upheld the capital gains tax as a valid excise tax. So can you tell us a little bit more about what that decision means?
00:12:45] Andy: Yeah. So just to back up a bit here our state legislature passed the tax and Governor Inslee signed it into law in early . Shortly after that, a small handful of millionaires and far right anti-tax organizations challenged the law in court. We fully expected this. We knew they were going to do so.
They had a pretty ridiculous legal argument that the tax, which is clearly structured as an excise or a transactional tax on extreme profits from the sale of corporate stocks and bonds. They tried to argue that it's a property tax. And then they said, well, since it's a property tax, the restrictions that we have in our state constitution apply, such as a strict 1% rate limit. And so the tax was in violation of those property tax restrictions in our Constitution.
[00:13:37] April: So opponents were arguing that that the capital gains tax was a property tax, kind of like what we pay as homeowners and renters?
[00:13:45] Andy: Yeah, that may sound strange. And the state Supreme Court very much agreed [that it’s strange]. As you mentioned earlier, it was a pretty overwhelming 7-2 majority ruling. They found that this argument that it's somehow a property tax really didn't pass the smell test.
And what they did find, as you mentioned, is that the tax is a valid excise tax on the sale or exchange of financial assets when those transactions generate extreme profits. And that's very in line with many rulings they'd had upholding other excise taxes over the years and decades. So we have the state real estate excise tax, which is a tax on the sales of real estate. We have the state estate tax, which is a transfer excise tax on transferring large estates when a wealthy person dies. You know, and many other excise taxes on the books.
Of course what's different and important about this one is that it applies to extremely wealthy people, which is why they challenged it in court in the first place.
[00:14:45] April: I see. And so if opponents’ argument was actually that the capital gains tax is a property tax, how come we heard so much about the tax being an income tax?
[00:14:55] Andy: So in public communications, the opponents of the tax didn't talk a lot about this property tax argument much probably because they realize it sounded pretty ridiculous. And instead, they talked a lot about it being an income tax. Mostly, that's just sort of fear mongering that wealthy people do whenever you try to raise their taxes is they make this kind of a slippery slope argument that, oh, sure, you're just taxing the wealthy people now, but pretty soon, somehow it'll it'll become a tax on lower income people.
From a legal perspective, what they were trying to say on this is they were referring to a case from 1933 called Culliton v. Chase, in which the state Supreme Court overturned a very broad based personal income tax, finding that that tax was a tax on property. But in this case, the court was very clear that the capital gains excise tax was nothing like the broad based personal income tax that was struck down in Culliton. And importantly, they did not authorize the legislature to enact a broad based personal income tax. They just said, nope, this is very much a straight excise tax, like the many other excise taxes that we have on the books and left it there.
[00:16:12] April: So it's obviously not an income tax and it sounds like the only slippery slope here is one to more access to quality and affordable child care, better schools, and a more equitable tax code?
[00:16:26] Andy: That pretty much sums it up.
[00:16:29] April: That's great. So earlier you also mentioned that we have a regressive tax code in Washington state. Some of our listeners might already know what we mean by that, but could you explain it and share how we know that our tax code is the most regressive in the whole country?
[00:16:47] Andy: Yeah. So when we use these words like regressivity or progressivity, or talk about the tax code being upside-down, what we mean is that we're looking at the state and local tax code and how it affects people of different income levels. So from the poorest portions of the population all the way up to the richest 1%.
And when we do this, what we find is that when, if you like, say, the poorest fifth of the population, people earning less than $25,000 per year, they pay nearly 20% of their annual incomes in state and local taxes on average.
By contrast, if you look at the wealthiest 1% of households and to be in that group, you have to make a minimum of about $550,000 per year. That's just the threshold, the floor to be in that group. The average incomes among that group are much larger. The wealthiest, the 1% pay only 3% of their incomes in state and local taxes.
[00:17:46] So, again, you're looking at the poorest fifth of households who are paying almost a fifth, 20%, versus the top 1% who are paying less than 3%. And so that's really unbalanced. And the distance between those two has repeatedly found to be wider in Washington state than in any other state in the nation. So we have the most regressive or most upside-down tax code of any state in the country.
Of course, that's just looking at averages by income. If you look a little bit deeper about who's impacted, the story actually gets worse. It won't surprise you or many of the listeners that generations of discriminatory banking, employment, housing and other economic policies mean that people who are Black, Indigenous, mixed race, and even some Asian communities are much more likely to be in that very low income, very high taxed region of our state's population, whereas people who are in that top 1% are much more likely to be white.
[00:18:47] So you have a tax code that rather than pushing back against unjust, you know, injustices and inequalities in our economy are actually making them worse. And so, yeah, it's not good to have a regressive tax code. And that's why it's important that lawmakers acted in 2021 to take the meaningful steps towards creating a more just tax code.
[00:19:12] April: So now that we have the capital gains tax, which asks more of which asks more from the top earners, what are we doing about balancing things at the at the other end of the spectrum? Like how are we reducing the share for folks with lower incomes?
[00:19:28] Andy: So the other important thing that lawmakers did in 2021, and again, this was something that we and many partners have been working on for a long time, was enacting the Working Families Tax Credit. And that is an appropriately focused tax credit for people with lower or moderate incomes. You can get up to $1,200 per year under the Working Families Tax Credit, and that's a really big key change towards creating a more just and equitable tax code for people for which it matters. You know, people with low and moderate incomes who are paying those very high effective tax rates.
The program just went online in the last few weeks. There have already been over 150,000 signups for the program. So people are very much taking advantage of this. And again, it is really the most equitable, focused way to, you know, address the fact that our tax code is so regressive for people at the bottom end.
And so, yeah, there are two really important shifts that occurred in 2021, the capital gains tax, which will increase taxes a little bit for people at the very top, and the Working Families Tax Credit, which will make a meaningful change for people at the middle and the bottom of the income ladder.
[00:20:47] April: And so now we have the Working Families Tax Credit kind of helping folks, and that is really centered around helping folks living with lower to moderate incomes. Are there any things that we could do to improve the credit?
[00:21:01] Andy: Yeah, we still have a ways to go. The tax code is still going to be upside-down or regressive, but we're still working to fix that. And in fact, there are proposals before the legislature this year, that communities are strongly advocating for that would expand the Working Families Tax Credit and also increase it. So we get a larger number of people, both younger people and older retirees, that would be able to access it and the dollar amounts would go up.
And so, you know, as I mentioned before, we're in this for the long haul and we're going to keep fighting to get those expansions enacted as soon as possible.
[00:21:39] April: Making our tax code more equitable, it's just so clear that it is a worthwhile endeavor helping us kind of achieve that goal towards economic justice. And this is just one of the reasons why the capital gains excise tax is so awesome. The wealthiest millionaires and billionaires will finally start sharing more responsibility for funding important public services that we all rely on. So let's talk about some of the ways that different communities across Washington will benefit. How will the funds from the capital gains tax impact people living in rural Washington?
[00:22:13] Andy: The capital gains tax is going to be a huge boost for the quality of life in rural communities across our state. First, it's important to note that the vast majority of the tax is being paid by a few very wealthy people who live in the greater Seattle metro area. But the revenue from the tax is going to be distributed across the state and, you know, in ways that are going to be very important for rural communities.
I mentioned earlier that over 500,000 kids across our state don't have access to licensed child care. That problem is especially acute in rural areas of Washington state. In fact, if you look at just Douglas County, there are only enough child care slots to cover 38% of children under five. So that's over 60% of kids in Douglas County who don't have access to high quality child care.
But the revenues from the capital gains tax, which again are mostly coming from very wealthy people in the Seattle metro area, are going to, you know, start to shift the needle in rural places across the state, including Douglas County.
So, yeah, the capital gains tax and the Fair Start for Kids Act, which is that big expansion of child care and early learning that it funds are going to be really, really great for rural communities across the state.
[00:23:27] April: And how will, like kids in general across Washington benefit from the funds that come from the capital gains tax?
[00:23:35] Andy: Yeah, so it's cliche, but it's true when you look at the research that investing in our kids really is a way to a brighter future for us all. You know, the economic benefits of high quality, affordable early learning have been, you know, richly studied. And there's just the benefits are huge. We have studies showing that it's up to a 12 to 1 benefit cost ratio. So that means for every single dollar we invest in high quality early learning today for the kids and those parents, their lifetime earnings will go up by $12 down the line.
And that's just a huge boost both for them, for their quality of life - that's the most important thing - but also for, you know, our state and local economies. Those additional resources get channeled back into additional consumer spending and new jobs. And so, yeah, this heightened investment in early learning is going to be great for kids, great for communities, and great for our economy.
[00:24:36] April: And how will this be a boost for the business community?
[00:24:40] Andy: Business leaders have been calling for those for the benefits that I just mentioned for heightened investments in early learning for decades now. And they you know, it's good for their bottom line and their workers need, you know, childcare and high quality childcare. And so they really have been calling for that need to be met.
And it's also important to note that investing in schools and in early learning makes the state a more attractive place for people who want to live, work, raise a family, start a business. It also makes it attractive to out-of-state investors who are looking at, you know, the overall environment of a state and how they think their businesses they invest in will grow. So this is definitely going to be a boon for the business community as well as for people in communities.
[00:25:28] April: I love hearing about all the ways that communities will benefit once the revenue from the capital gains tax starts coming in. So it's really awesome to hear all that. And as you said before, there's still more work to do. So what are some of the next steps lawmakers need to take in creating a truly equitable state tax code?
[00:25:47] Andy: Yeah, so as I mentioned earlier, we really need to expand the Working Families Tax Credit so that younger workers and retirees can take advantage of it. We also need to increase the amount of the credit. $1,200 is great, but people are really struggling in a lot of ways and we can do more to create a more just tax code and provide better supports for everyone in our state. So we need to do that.
We need to start further reduce taxes for lower and middle income households. But we also need to keep demanding that the wealthiest households pay more. You know, even with the capital gains tax in place, the wealthiest households in our state are still going to have some of the lowest overall state and local tax rates in the nation.
And, you know, lawmakers are still are very likely going to be sued for underfunding special education and school construction and other things related to our education system. So we have a long way to go in terms of creating a better school system and investing in many other important community priorities. And so, you know, we need to continue to ask the wealthiest households to pay a bit more to, you know, build a higher quality of life for everybody.
[00:26:59] We at the Budget and Policy Center have produced a fact sheet – It's on our website for those of you who are interested – that lists a number of options that would generate over $7.2 billion over the next four years. All of which would come in a very equitable way. It would be paid by people, you know, in the wealthiest end of the income scale.
Just to name a few. There has been, some of your listeners may have heard about the wealth tax, which is a new 1% property tax on financial assets, over $250 million per year. As I said, this is referred to as the wealth tax that would generate billions of additional dollars in the coming years. Very important reform.
[00:27:42] There's also been discussions about adding a new top tier to the state real estate excise tax. So sales of real estate over $5 million would pay a slightly higher rate, and that could generate hundreds of millions of dollars for affordable housing.
And finally, our state estate tax, which we've had on the books for decades, a highly equitable tax on transfers of multimillion dollar estates. There's a lot we can do to increase and make that a more effective and equitable instrument for financing important community priorities.
So as I said, cumulatively, those three options alone would generate over $7 billion over the next four years. And when you combine them with expanding Working Families Tax Credit, you've done a lot to build a more equitable tax code and one that can really support our state and help us thrive in the years ahead.
[00:28:39] April: And just to kind of throw in a little bit of a personal spin on this, like I live in Spokane Valley and I have two kids in the public schools out here, and we recently got letters from the superintendent saying, hey, federal funding is running out and we're going to have to start making budget cuts.
And it just really feels unconscionable that that would happen in a state where the richest people like not even in the United States, the richest people on the planet, live here. And they're the people that can most afford to chip in a little bit to help fund things that all of our communities benefit from.
And so it's just one of those things where I'm like, how do we really share in the responsibility together to fund these things that everyone in our communities benefit from? And how do we really tell our kids, like, you're important and you're worth investing in? And as a state, we're going to make it happen because we have the wealthiest people here who can really help to chip in on it.
So thank you for sharing those other ideas about where we can be getting revenue because it's very clear that we can do it and that we should do it.
[00:29:53] Andy: I totally agree, April. And, you know, just to put things in perspective, 7.2 billion may be a large sounding number, but it is a tiny fraction of what any one of the cento-billionaires in our state pull in, in a given year. So it's really not too much to ask that we get more funding from the very wealthiest households to support our schools, our childcare, early learning, and the range of other things that communities need to, you know, be healthy and to drive a higher quality of life.
[00:30:28] April: Thank you, Andy, for sharing all of your knowledge and experience. It's been quite the journey and I'm looking forward to what else will be possible in the future.
If you're interested in learning more about our research on the capital gains excise tax, go to the Capital Gains Tax page in the Policy Priorities section of our website at budgetandpolicy.org. We will also include links to resources mentioned in this episode on our show notes, which you can find at budgetandpolicy.org/podcast.
And if you'd like to join us in our movement for tax justice, make sure you sign up for our emails and check out the Balance Our Tax Code coalition and Invest in Washington Now.
Thank you for listening to this bonus episode of WA Possible. We'll start working on episodes for season two soon, so if you have ideas for the show, please feel free to contact us at firstname.lastname@example.org.
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