As I wrote last month, capital gains tax collections for FY 2023 were significantly higher than forecasted. By statute, the first $500 million collected in a year will go to the education legacy trust account (ELTA), a fund subject to the outlook (NGFO). Anything over that will go to the common school construction account (CSCA). The March state revenue forecast assumed that capital gains collections would total $248 million for FY 2023. As of May 9, the state had collected $849 million from the capital gains tax. If that figure holds, it means that the CSCA will receive about $349 million this year.

Last week, the Seattle Times editorialized that the revenues should be used for school construction as planned: “Now state lawmakers must remain true to the law and refrain from ogling the hundreds of millions of unexpected dollars with designs on using it elsewhere.”

Indeed, there is another important reason legislators should refrain from transferring capital gains tax collections from the CSCA for use on general spending items: state budget sustainability.

Although the ELTA is included in the budget outlook and subject to the four-year balanced budget requirement, it does not feed into the budget stabilization account (BSA, the constitutional rainy day fund). Under the constitution, the state must transfer 1% of general state revenues to the BSA each year. Thus, when general state revenues increase, so does the deposit to the BSA. This helps to ensure that the state is saving when revenues are strong. But dedicated accounts like the ELTA are not considered general state revenues, which means that capital gains revenues will not contribute to the BSA.

Meanwhile, capital gains tax revenues are volatile. A budget based on capital gains tax revenues might increase substantially one year and then drop dramatically the next. The Legislature directed collections over $500 million to the CSCA to help manage this volatility problem. One-time revenues should be used for one-time purposes (like school construction) rather than get absorbed in the NGFO for ongoing programs.