Discussions of Washington’s tax structure often include accusations that it is one of the most regressive in the nation. While some tax experts dispute that claim, another part of the conversation is what changes should be made to fix it.
Proposed operating budgets in recent years have included a capital gains income tax to make up for lost revenue from reducing the tax burden elsewhere. During this year’s session, the House operating budget would have imposed a seven percent capital gains, while reducing the property tax rate for seniors and veterans.
However, the absence of this tax has been a selling point for Washington state officials trying to attract new businesses. That’s according to Allison Clark, managing director for Business Development with the state Department of Commerce.
During a Sept. 19 panel at the Association of Washington Business Policy Summit, she said the lack of a capital gains income tax “is great marketing for us. If that’s taken off the table, that’s just going to be one less tool that we have in our economic development tool box that we are able to utilize and put to work in the state’s favor.”
Aside from that – and the debate over its constitutionality – real estate industry members warn that a capital gains income tax could have an adverse effect not only on potential property sales by retirees, but also on the state’s appeal to out-of-state investors who might have offset some damage to home values during the Great Recession.
Most of the real estate growth in Washington state has occurred in the Seattle metro area. After an extended period as the hottest market in the nation, median prices are beginning to cool.
However, Washington Realtors Association Government Affairs Director Nathan Gorton told Lens that “it’s important to note that it’s going from a white-hot market to maybe merely a hot market. While it’s softening, it’s softening from probably an historically all-time high.
“It’s still not a bad time to be a seller,” he added. “It’s certainly better for buyers, but it’s still considered a seller’s market.”
Redfin Senior Economist Taylor Marr told Lens the slowed price increase is perhaps a sign that “people are increasingly looking elsewhere outside of Seattle” for homes. It’s indicative that prices really did get too high. These (capital gains) taxes would have a similar impact of people wanting to look elsewhere.”
Last year Seattle metro experienced net migration – more people coming to the area than leaving, according to a Redfin report. That changed at the end of 2017, when more people began to leave.
The Seattle-based company’s report also observed that the migration patterns were heavily influenced by state tax policy. While there is a federal capital gains tax, Washington is one of the few states without a personal or capital gains income tax – all states with capital gains income taxes include them as part of an individual income tax return.
Marr said that “an income tax, regardless of rate, does impact where people decide to locate to. People overwhelming for the last five or so years are moving to places that are favorable for tax burdens. We’ve been getting a lot of migrations from northern California and even Oregon.”
Efforts by the City Council notwithstanding, the report notes “the fact that Seattle residents don’t pay state income taxes may be one reason Seattle had a net inflow, despite its staggering home price growth, up 58 percent in the past five years. Another reason is the thriving tech sector, with Amazon, Google, Facebook and others continuing to grow and attract new hires to the region.”
Determining the effect of a capital gains tax requires a bit of nuance. Under the IRS tax code, single filers can exempt up to $250,000 of capital gains on real estate, and up to $500,000 for married couples. The exemption doesn’t account for inflation.
State capital gains income tax proposals have also listed exemptions on house sales if it’s the primary residence, which means someone who bought a house in Seattle when prices were much lower wouldn’t be affected.
However, the tax burden would fall on investors who can help stem the bleeding in property values during a recession, Gorton said. During the Great Recession, “it was really outside real estate investors who came in and bought up a lot of the foreclosure properties. Sure, they weren’t doing it out of the goodness of their heart, but they came in, they cleaned out the house, they maintained and then eventually they sold them. In doing so they kept up the value of the other homes in the neighborhood.”
A capital gains tax might dissuade them from doing business in Washington, he added. “These investors are looking for opportunities nationwide if not international opportunities.”
The other problem is that although recent state legislation for a capital gains income tax exempts 401ks, most Americans don’t have that type of retirement fund. Many Washington residents buy rental properties and plan to retire off the sales, Gorton said.
“Exempting retirement accounts is a very Seattle-centric way to look at the world,” he said. “That just isn’t the case for a lot of people who live and work in Washington, especially rural Washington. Some of them (legislative proposals) have recognized that and exempted investment properties and some haven’t. We’re just going to keep making that point to legislators.”
Washington Policy Center Government Reform Director Jason Mercier notes that the lack of a capital gains income tax was touted as part of a Puget Sound proposal for Amazon’s HQ2.