State may push income tax, again

TVW recently interviewed the top budget writers in the Senate about the state’s outlook and the possibility of a special session.

In one interview, Sen. John Braun (ranking member of Senate Ways and Means Committee) said the governor needs to re-open state employee contracts to cancel the 3% pay raises due July 1.

In the other interview, Sen. Christine Rolfes (Senate Ways and Means Committee chairwoman) was asked if an income tax would be on the agenda for a special session. Sen. Rolfes told TVW: “Conversations about a capital gains tax, very likely would be a legal battle about is that an income tax or is it a sales tax or what kind of tax is that? I as a budget writer, I don’t look at that kind of policy as something that will dig us out of a hole in the next year. It’s something that we might want to look at ...”

In response to the question if an income tax could be part of a long-term reform, she said: “Sure. Everything is on the table. But people need to be.”

Washington voters have already rejected 10 straight income tax proposals. Moreover, every state and the federal IRS say a capital gains tax is an income tax.

According to the IRS: “This is in response to your inquiry regarding the tax treatment of capital gains. You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax.”

Legal problems aside, what about the budget implications of relying on a highly volatile capital gains income tax in a recession?

Sen. Mark Mullet (chairman of Senate Financial Institutions, Economic Development and Trade Committee) recently said: “I don’t think there is a way you can tax your way out of this because every industry in the state has been really decimated... California is freaking out because they do have a capital gains tax and that’s their first line item that they are saying they think is going to get completely annihilated.”

To Sen. Mullet’s point, here is what California Gov. Newsom said:

“Personal income tax revenues are revised downward by almost $33 billion due to a decline in all income sources, but particularly wages, proprietorship income, and capital gain ... Forecasting revenues associated with capital gains is subject to significant uncertainty because realizations are heavily dependent upon stock market performance and when taxpayers choose to buy or sell stock.”

As for spending policy changes, California’s governor said:

“Collective bargaining negotiations will commence or continue with all of the state’s bargaining units to reduce pay by approximately 10 percent, relative to June 2020 pay levels.”

Sen. Mullet is correct.

Along with reducing planned spending increases and utilizing the emergency reserves, there remains the possibility of additional federal funding flexibility.

As for an income tax, we should learn from the budget problems of our neighbors. California knows all too well that an income tax does not make your budget recession proof.

— Jason Mercier is the Washington Policy Center’s Center for Government Reform director. Email him at jmercier@washingtonpolicy.org.