Superintendent of Public Instruction Chris Reykdal plans to submit an agency requested bill calling for a capital gains income tax to help pay for his proposed 2019-21 K-12 budgets, which would also offset a state property tax reduction. The proposal is similar to that found in a bill introduced during this year’s legislative session.
If approved by the state legislature, the move could reignite a legal scuffle over whether a progressive income tax is allowed under the Washington State Constitution.
In a statement released Oct. 9, Reykdal proposed a capital gains income tax that would generate about $1 billion per year based on an eight percent long-term gain and partly fund a state property tax rate reduction.
Although he said at an Oct. 9 press conference that he does not consider it a tax on income, all states with a tax on capital gains include them as part of their income tax. Also, the Internal Revenue Service wrote in a September letter to U.S. Rep. Dan Newhouse that “capital gains are treated as income under the tax code and taxed as such.”
The new tax is part of an overall reform Reykdal hopes to see in the way the state allocates funding to different school districts. As part of an education funding package passed last year by the legislature to satisfy the McCleary ruling, the state property tax was increased while local levies were capped at $2,500 per student – or $1.50 per $1,000 of assessed property value.
Reykdal wants that formula changed so that the total levy authority can go up to 22 percent combined state and federal revenues for that district. He also wants the legislature to eliminate the 60 percent majority requirement for a school bond levy to pass.
“We have to look years into the future,” he said in the statement. “The old model of basic education was only the first step. We need to shift our focus onto what will transform our educational system. Our system can only claim success if it truly provides equitable opportunity and an unprecedented embrace of individual learning pathways for each student.”
The announcement came just weeks after state Department of Commerce Business Development Managing Director Allison Clark said at an Association of Washington Business policy summit that the lack of a capital gains income tax was a “selling point” for attracting businesses. Real estate economists have also warned that a capital gains tax can deter investors from buying property in the state.
A recent Redfin report noted “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.”
Reykdal’s overall idea is similar to HB 2967 proposed during this year’s legislative session by Finance Committee Chair Kristine Lytton (D-40). The bill cleared Finance but did not advance beyond the Rules Committee. However, a capital gains tax was included in the House proposed operating budget.
If a capital gains income tax was approved by the legislature, it could trigger a lawsuit claiming that it violates a state constitution’s provision that says property can be taxed no more than one percent of its value. Under decades of state Supreme Court rulings, income has been defined as property.
Reykdal told Lens that if the legislature decides to set up the tax, “it would be wise to put this in place for a year, and then have a mitigation strategy” that allows for a property tax reduction while the case moves forward.
“It’s really complicated to say, because who knows who would challenge or seek an injunction?” he said.
Another potential issue would be ensuring consistent revenue for K-12. In its 2012 McCleary decision, the Washington Supreme Court ordered the legislature to fully fund basic education and “amply fund it from regular and dependable sources.”
The fiscal notes for a capital gains income tax proposal from that same year said they “are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented here.”
Last year, Tax Foundation Senior Policy Analyst Jared Walczak warned against using revenue capital gains to pay for K-12. “Taxing only capital gains means accepting an enormous amount of variance and unpredictability in revenue, which arguably makes a capital gains tax a poor source of revenue for a priority like education.”
However, Reykdal says that’s why he’s proposing a tax on long-term rather than short-term capital gains. He added that he expects the legislature to account for that risk when determining how to invest the revenue. “We leave a ton of it on the table for the legislature to deal with it.”
While Governor Jay Inslee’s proposed operating budget last year did not include a capital gains income tax, at the Oct. 9 press conference, Reykdal said “I am optimistic that he will take risks in his budget.”
Reykdal’s proposed budget would increase funding for students with disabilities, add more professional learning days for school staff and allow schools to hire more nurses and counselors. The proposed budget would also expand career and technical education programs, while $400 million would go toward creating a new funding model for K-3 schools to reduce classroom sizes.
While high school graduation rates have improved in recent years, student proficiency in math and science has either flatlined or decreased. Also, recent state test scores on the Smarter Balanced Assessments showed overall improvement on English language arts, but little to no change on math. The tests were taken by students in third through eighth grade, as well as high school students.
However, Reykdal said “the far bigger economic opportunity isn’t obviously a single test score. The bigger economic risk is not graduating.” His hope is that appropriate investments are made to help high-risk students.
“I expect them (investments) to be very targeted in the future instead of a broad-brush stroke.” he said.