State Capital Gains Taxes Seen as Option for Raising Revenue

Many states are finally taking a more balanced approach to their budget troubles by looking to raise revenue to avoid further deep cuts to education and health care, including New York which recently restructured their tax structure to generate more revenue from millionaires and California which is considering the same. These kinds of reforms will help states shore up their immediate revenue shortages, but will also bring long-term stability and flexibility as they look to rebuild their economies in the years to come. However, there are a handful of states that don’t currently have the option of generating revenue this year by taxing wealth because they lack a state income tax, making them more vulnerable to lagging revenues in a prolonged downturn like we’re experiencing now. This is certainly the case for a state like Washington, which has experienced some of the most severe budget deficits over the past three years, because they are too dependent on the state sales tax as a revenue stream. That’s why the Washington State Budget & Policy Center is building support for a proposal to tax the capital gains of the state’s wealthiest residents.  

Once implemented, a capital gains tax could generate up to $1 billion a year for Washington state, providing much needed revenue to begin to reinvest in the education, health and other public structures that have taken such a dramatic hit over the past three years. The proposal currently being advanced would place a 5% percent tax on capital gains, while allowing for a reasonable exemption threshold to ensure that 97% of state residents wouldn’t pay additional taxes. 

There are currently nine states in the country with no state income tax, and none of them tax capital gains broadly (although Tennessee and New Hampshire tax interest and dividend income). As the graph below shows, a strong majority of states already tax capital gains at 5% or higher:

(Click map to enlarge.)

Washington has already seen $10 billion in cuts to education, health care, public safety and a host of other critical programs and services over the past three years, and again faces a significant budget hole this year. This proposal is the kind of sensible and forward-thinking solution that would help the state rebuild from the devastating impact of the Great Recession in the coming years, while also helping to protect against future downturns by providing more stability and flexibility to the tax structure. Other states in Washington’s predicament would be smart to consider similar measures.