We are more than halfway through the 2015 legislative session and though, by tradition, the 2015-17 budget will originate in the State House this year, so far the Democrats in the House haven’t made much progress on getting a majority to support the budget-busting agenda which Jay Inslee laid out last December. On Wednesday, a reporter asked Democrat Rep. Ross Hunter—the lead budget writer—what kind of revenue sources the Democrat-controlled state House are considering to fund increasing the state budget to meet the desires of their special interest supporters. Here’s how Hunter answered:
“Well the governor made a couple of proposals, he proposed a capital gains (income) tax. We are one of the few states in the entire country that doesn’t have a capital gains (income) tax… I have some quibbles with the rate in Inslee’s capital gains (income tax) proposal… We have the most unfair tax system in the entire country… Whatever we do should move in the direction of fairness and a capital gains (income) tax would do that.”
By Hunter’s answer, it’s pretty safe to assume that the state House will include a capital gains income tax in its budget proposal. Hunter defended the capital gains income tax using the “fairness” argument so often employed by his colleagues. But, is a capital gains income tax really all that fair? Considering the disproportionate impact the tax has in the long term, no.
As Shift recently reported, a study conducted by the Tax Foundation found that our nation’s high capital gains tax—let alone an additional state-level capital gains tax—is “problematic, because the capital gains tax creates a bias against savings, slows economic growth, and places a double-tax on corporate profits.” Additionally, the Tax Foundation points outthat “although these problems with the capital gains tax are well known, there is a more subtle issue with the tax that makes it even worse for taxpayers than these conventional concerns suggest.” The Tax Foundation,
“Under the federal tax code, the increase in an asset’s price is determined as the nominal amount (i.e., not adjusted for inflation). When an asset (often a stock) is sold above its purchase price, a gain is realized and is taxed. Any capital gain due to inflation is not accounted for, and the taxpayer is taxed on both their increase in income and on increases in prices economy-wide. As a result, the effective tax rate on the real (inflation indexed) capital gain has exceeded the statutory rate every year since 1950 and has averaged around 42 percent.
“In some instances, the practice of taxing the nominal gain can lead to an infinite effective rate on real capital gains when the increase in price is only due to inflation. In fact, if a taxpayer purchased an average stock in 1999, 2000, or 2007 and sold in 2013, they would be taxed entirely on inflation.”
The Tax Foundation finds that it is, in fact, unfair to tax an investor on stocks or property that increased in price only due to inflation. It is also unwise to implement a tax that creates bias against saving and investment. The study concludes that repealing the capital gains tax is the best course of action in order to “stop the damaging practice of taxing individuals on inflation” and “produce positive long-term dynamic effects for the economy.”