Opinion: An income tax on capital gains won’t bring revenue stability

Taking effect for the first time this year, Washington is now the only state in the country to impose a standalone income tax on capital gains.
Taking effect for the first time this year, Washington is now the only state in the country to impose a standalone income tax on capital gains.

Taking effect for the first time this year, Washington is now the only state in the country to impose a standalone income tax on capital gains

Jason Mercier
Mountain States Policy Center

With property tax assessments increasing rapidly in Wyoming, some have begun to discuss whether there should be changes to the Cowboy State’s tax structure. It is important to first remember that assessed property values do not necessarily drive the actual property tax bill. Instead, that tax obligation is primarily set through the budget process by the amount to be spent (whether approved by government officials or voters through levies).

Jason Mercier
Jason Mercier

Concerning Wyoming’s current tax structure, as one of just a handful of states without a personal income tax, extreme caution should be taken to avoid losing this economic competitive advantage. This is especially true with any discussion of imposing a highly volatile and unpredictable income tax on capital gains.

Taking effect for the first time this year, Washington is now the only state in the country to impose a standalone income tax on capital gains (other income tax states tax it as ordinary income as part of their income tax codes). The policy choice has resulted in national tax rankings removing Washington’s prior standing of not having a personal income tax.

The federal Internal Revenue Service (IRS) has made it very clear that a capital gains tax is an income tax. Our friends at the Washington Policy Center posted this letter from the IRS clearly explaining this fact.

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. More specifically, capital gains are treated as income under the tax code and taxed as such.”

Imposing taxes on capital gains income is not a recipe for predictable state revenue.

As explained by the California Legislative Analyst’s Office (LAO):

“California’s tax revenues have numerous volatile elements, but among the more significant sources of revenue volatility are the state’s tax levies on net capital gains through the personal income tax.”

The CA LAO further cautions:

“Capital gains depend heavily on movements in financial markets. As such, capital gains revenue is extremely volatile and difficult to predict. In any given year, there is significant risk that capital gains revenue could fall below budgetary expectations.”

If the goal of structural state tax reform is to improve budget stability and avoid boom-and-bust tax collections, an income tax on capital gains is the worst possible choice Wyoming policymakers can make.

Jason Mercier is the vice president and director of research at the Mountain States Policy Center.


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2 Comments

  1. Nike

    This has nothing to do with “revenue stability” and EVERYTHING to do with backdooring a State income tax on the people of what’s left of Washington State. Imho, of course, since I could be completely wrong about the motives of the glorious leaders in Olympia.

    Reply
  2. Margaret

    In Clark County, WA, it appears that Property Tax assessments do drive property tax bills. (The deadline to appeal an assessment value is ~60 days after property tax notices are mailed.)
    When local governments decide on their budgets, they factor in increases in assessed value increases when making budgets, or increasing those budgets during the year via a supplemental budget.. They budget based on the estimates of assessed value increases on existing property, and new construction.

    Voter approved tax hikes are common. Even when levy rates stay the same, increased assessment values cause taxes collected to increase.
    When voters lift levy lids, taxes go up.
    Levy rate tax hikes are explained to voters as “renewals”. Voters might think the levy is being “renewed” at the existing levy rate.
    In most cases, a “renewal” is typically a LEVY RATE HIKE, causing taxes to go up AND UP..
    Voters should carefully consider the impact of voting for levy lid lifts, and levy rate increases. The amount of taxes collected already increases because of the rapidly rising WA state property tax assessments, and new construction, without bloated levy lid lifts and levy rate hikes.

    Reply

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