When I last wrote about the capital gains tax, the House Finance Committee had just passed an amended version of the Senate-passed bill. On April 21, the House passed the Finance Committee version. On April 22, the Senate declined to concur with the House’s amendments. A conference committee was then named, and that committee crafted a compromise version of the bill. The compromise version was passed by the House on Saturday, April 24, and by the Senate on Sunday, April 25.

As was the case for the bill that originally passed the House, the compromise Bill applies a 7 percent tax to capital gains reported on the taxpayer’s federal income tax return. It provides a $250,000 standard deduction for individual and joint returns. Married couples or registered domestic partners that file separate returns are allowed a total deduction of $250,000 across their two returns, rather than $250,000 on each return.

Exemptions include:

• All real estate
• Various retirement savings plans, for example IRAs, 401(k)s, 403(b)s
• Property sold because of a federal, state or local government condemnation proceeding
• Cattle, horses and breeding livestock used in farming or ranching
• Agricultural land in cases where the seller has been actively involved in its use
• Timber or timberland
• Depreciable property used in a trade or business
  Goodwill included in the price received in the sale of an automobile dealership
• “Qualified family-owned small businesses”

The final bill contained two significant changes from the bill that originally passed the House:

• The revised bill provides a limited deduction for charitable donations. To qualify for the deduction the taxpayer’s donations must exceed a $250,000 threshold. The amount to be deducted is the excess of the taxpayer’s donations above this threshold. The deduction is capped at $100,000. (The bill passed by the House on April 21 provided no charitable deduction.)
• Under the revised bill, the first $500 million of revenue from the tax in 2023 will be deposited in the Education Legacy Trust Account (ELTA); any revenue in excess of $500 million will be deposited in the Common School Construction Account (CSCA). For subsequent years, the cap on ELTA deposits will be adjusted for inflation, as measured by the Seattle-area Consumer Price Index. (As passed by the House on April 21, all revenues went to the ELTA.)

As Emily and I have previously noted, capital gains taxes are extremely volatile. With volatile taxes, it is good fiscal practice to set aside some revenue from high tax years to be spent in low tax years.

This principle is embedded in Washington’s constitution, which requires that one percent of general state revenues be transferred the BSA at the end of each fiscal year and, in addition, that three-quarters of extraordinary revenue growth be transferred to the BSA at the end of each biennium. Extraordinary revenue growth is defined as the “amount by which the growth in general state revenues for that fiscal biennium exceeds by one-third the average biennial percentage growth in general state revenues over the prior five fiscal biennia.”

Because of the restrictions placed on the use of monies in the ELTA and the CSCA, revenues from the capital gains tax will not be considered to be general state revenues and will not feed into the calculation of the amounts transferred to the BSA. This is unfortunate, particularly with respect to the calculation of extraordinary revenue growth given the extreme volatility of capital gains.

Proceeds from the capital gains tax should have been directed to the general fund, where they would be general state revenues.