The centerpiece of governor Jay Inslee's budget proposal is a 7 percent capital gains tax. The tax would kick in once an individual earns $25,000 in income from the sale of a stock, or $50,000 on a joint return, bringing in $798 million over the two-year budget cycle. Along with Inslee's equally progressive carbon tax, the tax on capital gains would prop up the governor’s overall $39 billion budget proposal with a combined $1.4 billion in new revenue.
Republicans, like Senate Ways and Means chair Andy Hill (R-45, Redmond), are opposed to Inslee’s capital gains plan. In the run-up to this year’s legislative session, at an AP preview forum in December, Senator Hill specifically criticized the tax, saying: “The capital gains tax is one of the most volatile revenue sources. It goes all over the place. It is very, very sensitive to federal policy, of which we have no control. The mere whisper of a change in capital gains treatment has people going to the brokers and buying and selling and going all over the place. If you want to write sustainable, reliable, and predictable budgets that’s probably not the best tax source.”Public finance records show that Senator Hill has a vested interest in opposing new taxes, particularly Governor Inslee's 7 percent capital gains tax.
Hill is also quick to point out that, with $2.8 billion in revenue growth over the last state budget, Inslee doesn't need dreaded new taxes to pay for these basics. In a December white paper titled "The Deficit Myth," Senator Hill wrote:
"[T]he state has sufficient revenue to cover all the existing costs and make the next required enhancement of McCleary [the court’s K–12 education funding mandate]. The focus of this session should not be on higher taxes."
But it’s worth noting that public finance records show Senator Hill has an apparent vested interest in opposing Governor Inslee's 7 percent capital gains tax. Hill is one of the richest members of the state legislature, with 20 investment portfolios out of 25 total valued at no less than $100,000 each. (The Public Disclosure Commission form does not require specific valuation; the top category for funds is simply "$100,000 or more.")
On Monday, January 12, the first day of the legislative session , Senator Hill's Republican caucus backed up his budget agenda by passing a procedural rule that would make passing a new capital gains tax virtually impossible: The senate Republicans voted to require two-thirds approval to bring a new tax measure to the floor for a vote.
Hill's "Deficit Myth" argument misses a basic point, liberals say. According to the lefty Washington State Budget and Policy Center, the 8.6 percent revenue growth that Hill talks about is "eaten up" by maintaining the existing budget, plus pensions, and bond payments—nearly $2.6 billion, says WSBP analyst Kim Justice. When you also add new costs such as the McCleary mandate (lowballed at $750 million this biennium), voter-mandated smaller class sizes beyond McCleary, court-mandated social service costs, and teacher salaries, you're back in the red.
While Inslee's budget team readily acknowledges that his new taxes are helping fund political "policy choices," the money is hardly going to fund anything extravagant. In fact, Inslee's additional revenue is earmarked toward line items that the public (and the Washington State Supreme Court) has mandated.
A portion of the carbon tax (40 percent is for education) and all of the capital gains tax will pay for the court's K–12 McCleary mandate ($1.3 billion), early learning ($150 million), mental health ($650 million), and teacher salary increases ($386 million) mandated for years by voter-approved I-732, but regularly ignored by the legislature.
And after years of cuts, Inslee's budget point person, Office of Financial Management director David Schumacher told me the governor's message is, "'We're not going to fund education on the backs of human services.'”
"What really stinks," Inslee spokeswoman Jaime Smith adds, "is having the most unfair tax system in the nation. If you’re a truck driver or a teacher or a construction worker, you’re already doing your fair share. If you’re one of the wealthiest people in Washington," she says referencing Inslee's capital gains tax, "with significant investment earnings, you can do a little more."
About 32,000 people (fewer than1 percent of the state's taxpayers) would pay the tax on earnings off stocks. (Inslee's proposal excludes money earned from selling your primary residence or gains from retirement accounts.)
Senator Hill, a former Microsoft exec, would be among the 1 percent affected by Inslee’s capital gains tax proposal. According to financial disclosure reports, Hill has 21 brokered or managed funds—and 20 worth at least $100,000 and one worth between $40,000 and $99,000—that could be subject to the tax. Four of those funds earned at least $100,000 according to Hill’s latest disclosure report, filed last April, and seven of them earned between $40,000 and $99,000. However, public disclosure forms don’t include the total income from capital gains
The staff at Public Disclosure Commission recommended amending its forms last summer to specify how much politicians were earning from capital gains, but the five commission members, who are appointed by the governor and approved by the senate, did not sign off on the suggestion, PDC staffer Lori Anderson says.
Twenty-four of Senator Hill's 25 funds are simply listed as blind trusts (23 are managed by Charles Schwab and Co. and one is managed by Goldman Sachs), so it is impossible to know what specific stocks Hill has.
Senator Hill did not respond to several requests to be interviewed. Specifically, I let him know I was looking for a response to the appearance of a conflict of interest over capital gains taxes.
Governor Inslee reports 11 stocks, including Costco, Starbucks, and a number of Russell and S&P MidCap funds. Seven of the funds are worth between $4,000 and $19,999, two of the funds are worth between $20,000 and $39,999, one of the funds is worth between $1 and $3,999 (Totally Green Inc.) His most valuable fund (iShares Russell 1000 GR Index) is worth between $40,000 and $99,999. Four of the funds reported no income and the remaining seven reported between $1 and $3,999 in income.
The fate of Inslee’s proposal is largely in the hands of the Senate Ways and Means committee, which, again, is controlled by Hill.