Capital gains tax brings in $330M more than expected for state budget

Washington state is expected to bring in $327 million more in revenue than originally forecast, according to estimates released by the Washington State Economic and Revenue Forecast Council.

The Office of Financial Management credited the additional money coming in from the new capital gains tax. Now the office predicted the state will have $66 billion for the 2023-2025 budget.

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“We are increasing the forecast by $327 million which is, by any objective measure, a lot of money, but it’s also under half a percent of the total revenues forecasted for that budget period,” Steve Lerch, Executive Director of the Economic and Revenue Forecast Council, told Heather Bosch in a KIRO Newsradio interview. “It’s not a huge change. We didn’t make particularly dramatic changes in the economic forecast, but probably the biggest piece were some revisions to the forecast for capital gains revenue.”

The capital gains tax creates a 7% excise tax on the sale or exchange of capital assets above $250,000 within Washington state. The bill creating the capital gains tax, SB 5096, was signed into law by Gov. Jay Inslee in 2021 to go into effect in January 2022, but was halted by multiple lawsuits challenging its validity and claiming it’s a slippery slope for the state to establish an income tax. The Washington State Supreme Court made a ruling in March to uphold the constitutionality of the bill.

The Office of Financial Management stated it will have to wait until this fall — when final returns are due — to have more certainty about the actual collections from the tax.

“The money goes into two accounts,” Lerch said. “It goes into the Education Legacy Trust account, which is used to pay for K-12 operating costs. And then it also goes to the Common School Construction Fund, which is just what the name sounds like. It’s used to pay for building elementary, middle, and high schools.”

The council also increased the Near General Fund forecast for the following biennium (2025–27) by about $147 million, with total expected revenues of nearly $70.5 billion, according to The Office of Financial Management.

Washington’s financial state

WalletHub released a survey earlier this month comparing the 50 states and the District of Columbia’s individual economies with 28 indicators of economic performance and strength, and found that Washington state, with a total score of 68.13, ranked as the healthiest economy. Utah (65.04), Massachusetts (64.89), Colorado (62.89), and California (61.04) rounded out the top five, while West Virginia (24.12), Louisiana (25.04), Alaska (28.48), Mississippi (28.67), and Hawaii (28.76) qualified as the five lowest-ranking state economies.

“One of the things that happened when COVID hit was a ton of uncertainty. It was obviously uncharted territory for pretty much everyone,” Lerch said. “But what we saw was things bounced back incredibly quickly. Part of that was due to things like the PPP program that helped employers keep workers on, the stimulus checks that went out to households, and the expanded unemployment insurance benefits. We actually saw revenues grow at a pretty quick pace. As we got out of the COVID pandemic, things have definitely started to slow down. And that is our anticipation, things will be growing more slowly than they have been in the past.”

Despite Washington state’s health financially, many experts and analysts are preparing for a possible recession in the second half of 2023, potentially bleeding into 2024.

“What we have in this forecast might technically be called a recession,” Lerch said. “We do have two quarters of negative, but not very negative GDP growth, before we see growth bouncing back. So we could call that a mild recession. We would definitely call it a slowdown in economic growth.”

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Lerch cited that the federal government has been raising rates to try to pull inflation rates down, but, according to the latest inflation data, prices in May were 4% above where they were in May of 2022 — approximately double what the Federal Reserve has been targeting.

“But overall, the health of our state seems to be pretty good financially. Can we conclude that from the numbers you’re seeing in the forecast?” KIRO Newsradio reporter Heather Bosch asked.

“Yes, I think so,” Lerch responded.

Heather Bosch, an award-winning anchor and reporter at KIRO Newsradio, contributed to this reporting