In advance of Senate floor action on the capital gains tax bill (SB 5096), Sen. Robinson has proposed a striking amendment. (Kriss wrote about the bill as passed by Ways & Means here, and I wrote about how it would make our revenue structure more volatile here.)

The striker would broaden the small business deduction, remove a provision requiring ambiguities to be construed in favor of the tax, remove a provision authorizing reciprocal tax collection agreements, and change where collections would be deposited.

As I wrote last week, the bill as passed by Ways & Means would direct capital gains tax collections to two dedicated funds—thereby bypassing Washington’s constitutional rainy day fund (the budget stabilization account, or BSA). The striker would deposit the first $350 million a year into the education legacy trust account, the next $100 million into the general fund (GFS), and the remainder to the new “taxpayer fairness account.” (These amounts would be adjusted for inflation.)

This means that $100 million a year would now be subject to the 1% and extraordinary revenue growth transfers to the BSA. However, the bill also allows for a credit against business and occupation taxes to avoid double taxation. The $100 million a year that would be deposited in the GFS would barely offset the impact of those B&O tax reductions to the GFS. On net, this means that there would be essentially no transfer to the BSA.

The striker also adds new intent language, including this:

In an effort to both reduce the tax burden on those earning the least and to account for anticipated volatility in revenue collections from the capital gains excise tax, revenue received above base levels will be deposited into the taxpayer fairness account. Revenues deposited in this account will be used to offset existing tax burdens via policies such as funding of the working families’ tax exemption.

There is nothing in the striker that specifies what the taxpayer fairness account may be used for, or whether there would be any restrictions on its use. While it is good that the striker recognizes that the tax would be volatile, people should understand that funding for tax burden relief and the working families tax exemption would not necessarily be available every year. (The Washington Budget & Policy Center has suggested that to address the volatility of capital gains taxes, revenues above $350 million should be used “for one-time expenses.”)

If you’re going to have a capital gains tax, the best way to manage its inherent volatility is to deposit all collections in the GFS so that the full amount is subject to the 1% and extraordinary revenue growth transfers to the BSA. Funds in the BSA are more protected than money in other state funds, so they are more likely to be there to help smooth out spending when revenues decline. Additionally, because capital gains revenues are not dependable, legislators should avoid building budgets that rely on them.

(The striker’s new intent language also references the regressivity of our current tax structure. For more on that, see here.)