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Democrats have a messaging problem on capital gains. Here is how they can fix it.

Passing a capital gains tax has long been a goal of progressives in Washington State. Even a number of moderates support a capital gains tax, with conditions.

But, some advocates are not being honest about why a capital gains tax might make sense. And, that lack of honesty is causing problems for those who hope to see this legislation cross the finish line.

To explain, let’s start with the finish line.

Getting this SB 5096 passed might be more likely this year than in years past, given the character of the Democratic majorities this year.

But, in the 11 previous times that an income tax went to the ballot, it lost. This initiative will undoubtedly be challenged, either in court or at the ballot box or both.

If it goes to the ballot box, Democrats need to level with people to have a chance. The messaging should be direct, honest, and meaningful to regular voters.

So, what is wrong with the Democrats messaging on this? Let us count the ways.

Many have argued that the reason to pass a capital gains tax is to get in new revenues to state coffers hamstrung by the pandemic economy. They claim that the pandemic has hit the state hard now, and to mitigate such impacts in the future, a capital gains tax should be implemented to make up for that hypothetical future lost revenue.

That doesn’t make much sense, to be practical.

Capital gains taxes are cyclical. The revenue from those taxes go up when economic times are good. They fall when times are bad. So, if the purpose of these taxes is to offset future shortfalls, this tax is among the worst ways to do it.

Moreover, this week’s revenue forecast made clear that a revenue shortfall isn’t Washington State’s problem. The bump up from the November forecast, leaving over $3bn in state reserves after this biennium, is perhaps the largest single upward revenue adjustment in the history of these forecasts.

This is why another messaging strategy hurts Democrats.

The idea that this capital gains tax is needed for investments is tough to swallow with $3bn in the bank. Those are real dollars, equal to about 6% of a two-year GF-S budget.

If investments are needed, there are dollars here to make it happen without new taxes.

Both the idea that new revenue is needed because of the economy or that new investments are needed because of state need will fall on deaf ears among voters this November. It just doesn’t pass the smell test with large surpluses in the bank.

Some believe the reason for this capital gains tax is to bring the question of an income tax to the Supreme Court. The thinking is that this bill calls the question of coupling income and property, and offers the best bet for a progressive income tax.

That may or may not be true. But if voters believe they are getting sold one bill of goods (“We need the revenue!”) while taking home another (“We want a court case now!”) on a capital gains tax, the capital gains tax’s fate is likely as dead at the ballot box as the other 11 attempts. It won’t matter how the case is decided, if the Court were to rule at all.

So, where does that leave Democrats? If arguments for revenue, or investments, or a legal strategy are unlikely to fly with voters, what will?

I think maybe the truth.

At the heart of Democratic interest in a capital gains tax is the belief that the tax code in Washington State should be fairer than it is, and that the income inequality in Washington State is a central problem in our society with many negative consequences.

Washington State ranks between the absolute worst for income inequality or the dead-set middle average, depending on how you do the math. If you compare the top 1% with the bottom 99% of income earners, we are 10th. If you compare the top 10% with the bottom 10%, it turns out we are 25th. If you compare the experience of local communities relative to one another within a state’s boundaries, the economic distance between Medina and Mennonite communities makes us the most unequal state in the country.

Whatever the relative ranking is, when you look at homeless Washingtonians living beneath a newly built skyline of Seattle, it sure seems like inequality is a problem — whether you’re a Democrat or not.

If you’re paying 10% sales tax on groceries, over 1% on an already hard to afford home, or a B&O tax that hits small businesses harder than larger, you’re doing it while watching record corporate earnings announcements and newly minted tech zillionaires drive fancy cars. You’re doing it while you worry about paying your student loan debt, and whether your kids will ever be able to own a home. (That’s me talking, I guess.)

Whether it’s homelessness in one of the world’s richest cities, or the pressure from a tax code that seems to target regular folks, it just seems like there is a structural unfairness to Washington State’s economy.

Washingtonians increasingly believe this, I think. It’s something Democrats here have felt for years.

It is this point where the messaging strategy for a capital gains tax makes the most sense.

Be honest: the primary reason Democrats are running a capital gains tax is because they believe the tax code is fundamentally unfair and that this helps to provide some measure of balance.

They should prove it.

If the House believes the tax code is unfair, it can offset the projected gains from the capital gains tax with reductions in the sales tax.

The general idea is in SB 5096. It includes some set aside for potential tax reductions. Instead, use all of the funds for tax offsets, and make it clear, not hypothetical, as is the case currently.

Rather than a general reduction in the state sales tax, which would apply to everyone and be less progressive as a result, why not create targeted exemptions for the state share of sales tax. We do that for property tax and B&O tax, and even some areas of sales tax.

This would allow this bill to become an even greater counter-weight to Washington’s regressivity.

If you are on Medicaid and have a Medicaid beneficiary card, no state sales tax for you.

If you’re on unemployment and can show that to the cashier, no state sales tax for you.

If you’re the parent of a child with free or reduced lunch at a public school, no state sales tax for you.

You get the idea. Some of these might be less palatable than others. That’s what the legislative process is for. We did something similar for years with out of state license holders. We’re even smarter about this stuff now.

You have the votes, Democrats, to pass the capital gains tax. And what you really want is to address income inequality.

So, do both. Offset all of the capital gains revenue with targeted tax exemptions to help moms, kids and families out of work.

Come November, if you ask voters whether they want to repeal the bill that removed sales tax for kids on reduced lunch, you might have a shot with the voters at the ballot box.

Your support matters.

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