Predictable

Washington is a deep blue state whose constitution under a poorly reasoned old state supreme court decision prohibits it from imposing an income tax. That causes the state’s progressive Democrats to look for work arounds.

They succeeded with a capital gains tax that its supreme court upheld as an excise tax (see my 2023 blog post for more details and thoughts). An effort to repeal the tax via referendum in 2024 failed by a lopsided vote (failed to get 40% of the vote!). Apparently, after a couple years of experience most voters recognize they don’t and likely won’t ever pay the tax (it has a $270k exemption indexed for inflation) or are okay with paying. So, it looks like it will be around for a while.

Its revenues are volatile. 2022 revenues came in well above estimates at $899 million (later revised down to $786 million). 2023 revenues, by contrast, were $433 million or a 45-percent drop from 2022 and that was without a recession and only a modest bear stock market in 2022 (e.g., comparable to the 2000-02 or 2007-09 markets, anyway). Capital gains are inherently volatile, even more so when limited to concentrated amounts. (FWIW, Jeff Bezos moved his residence to Florida, according to reports, possibly to avoid the tax.)

With a big pending budget gap, it’s time for more workarounds. Beside tapping nearly $3 billion from reserves, Governor Islee has proposed a 1% wealth tax on individuals with $100 million or more in assets. He’s conveniently leaving office in January. Washington must require even outgoing governors to submit budgets.

The tax is estimated to apply to 3,400 individuals (not sure how couples are counted) according to the newspaper story. If one assumes an average 6.5% return on wealth (not sure how the tax would exactly be calculated – e.g., the article implies only stocks, bonds, bank accounts, and other securities are taxable), a 1% wealth tax equals about a 15% income tax. (Lower return assumptions = higher implicit tax rates, obviously, and vice versa.) Putting aside publicly traded stock, bank accounts, and treasury securities, valuation challenges will be an issue – especially for closely held business interests and thinly traded bonds – if this were to be enacted. I assume a lame duck Governor’s proposal does not carry much political weight. This NPR story implies Islee’s successor is not onboard, at least at this point.

In my view, this points out the unintended consequences that result from constitutional limits on taxes. It causes venturing into problematic areas. Many states, including Minnesota, had property taxes on intangible property, which this proposal is with a mega exemption, and abandoned them because of compliance and administration problems. Minnesota’s tax was a 3 mill levy on “money and credits” that was suspended in the 1940s. The statute was finally repealed in 1979 (I was around for that) as obsolete.

I would observe the same is true about limits on debt. For example, Minnesota’s supermajority requirement leads to (1) larger bonding bills to “buy” support to get to the required supermajority and (2) use of higher-interest rate appropriation bonds for controversial projects (see legislative office buildings and the Vikings stadium), rather than plain vanilla general obligation bonds. Those are unlikely to be results the original sponsors wanted or expected, when they made it more difficult to issue GO bonds.