Capital gains tax receipts in Washington state tumble

Washington State Standard

May 22, 2024 / 11:27 am

Washington state officials report $433 million in payments in April, down from $786 million in 2023. Lawmakers may need to address the decline.

Capital gains tax collections in Washington have plummeted in their second year, creating potential challenges for the next governor and legislative budget writers in 2025.

Washington took in $433 million as of May 15, 2024. That's down from $786 million netted in 2023, the first year the tax was paid. The number of those filing remained steady, according to state Department of Revenue data.

And again, a handful of filers accounted for a significant share of the dough. The top 10 payments accounted for $142 million this year compared to $394 million last year. Overall, there were around 3,000 payments in each of the last two years. There are nearly 8 million people in Washington state.

State lawmakers knew the capital gains tax would be an unpredictable revenue source, prone to up and down swings. Now they have a better sense of what that volatility looks like.

“It’s such a new tax. We’ll see what happens,” said Sen. June Robinson, D-Everett, chair of the Senate Ways and Means Committee. “It looks like revenue for the budget will be less. As a budget writer, you don’t like to see that but I’m really not that surprised.”

How much less isn’t clear yet.

Each fiscal year, up to $500 million from the tax is deposited into a state account for schools, early learning, and child care programs. Any tax collections beyond that amount go to an account that helps pay for school construction and renovations.

The tax has generated slightly more than $1.2 billion for the current two-year budget cycle, which runs through June 30, 2025. But lawmakers counted $1.5 billion for the state’s operating and capital budgets, and $1.7 billion in the next biennium.

That means steps may be needed to cover any gap. Next month, the state’s chief economist will release a new revenue forecast with estimates of how much this tax will bring in for the next couple years.

“We need to see the complete forecast to determine the impact on the current and next budgets,” Mike Faulk, press secretary for Gov. Jay Inslee, said in an email. “While the precise impact can’t yet be determined, it is providing important funding for education and early learning.”

Backers of the tax also said it’s too soon to fret about budget adjustments.

“Revenue from Washington’s capital gains tax is expected to fluctuate year to year based on changes in the economy, so the lower numbers are not unexpected and can be managed through the typical economic and revenue forecasting and budgeting process,” said Misha Werschkul, executive director of the Washington State Budget and Policy Center.

“Last year’s tax collections were unexpectedly high, as can often be the case in the first year of a new tax,” Werschkul added. She said she expected future totals nearer to what occurred in April. “And we’d expect the collection numbers to increase over time from this point.”

Meanwhile, an initiative on the November ballot would repeal the tax if approved by voters. Robinson has said its repeal would create a “big hole in the budget.”

On Wednesday, opponents of the ballot measure are launching their campaign with a series of events around the state.

By the numbers

The capital gains tax levies a 7% tax on the sale or exchange of long-term capital assets, such as stocks, bonds, and business interests. It doesn’t apply to real estate sales and only covers gains above $262,000, up from $250,000 for the 2022 tax year, as the floor is tied to inflation. Lawmakers approved the tax in 2021. It took effect after the state Supreme Court upheld it in a ruling last year. The first payments were due in April 2023.

This year, Washington received 3,214 payments by the mid-April deadline. There were 1,193 returns filed and 2,657 extensions requested. The total includes 636 taxpayers who filed a return or requested an extension but did not include a payment, revenue officials said.

The final total of tax receipts won’t be known for months. Those who sought an extension to complete their returns had to make an estimated payment by last month’s deadline. Some of them will have overpaid and be due refunds while others may owe more.

For comparison, last May, the department reported an initial tally of $850 million. But with reconciliation of late payments and refunds thus far, revenue officials have since revised that haul down to $786 million.

This was originally reported by The Washington State Standard.