Initiative 2109 would repeal the state capital gains tax statute. The Office of Financial Management estimates that repealing the capital gains tax would reduce state revenues by $424 million in FY 2025, by $820 million in the 2025–27 biennium, and by $919 million in the 2027–29 biennium. The reductions would only affect the education legacy trust account (ELTA)—there would be no impact to the common schools construction account.

Capital gains tax collections declined by about half from the first to the second year of collections. Under the current revenue forecast, the capital gains tax is estimated to make up only about 1% of biennial revenues from funds subject to the outlook (NGFO).

Capital gains tax revenues are commingled with other sources of revenues in the ELTA (which may be used for education expenditures) and there is no way to determine precisely which policies are paid for with capital gains tax revenues. Further, the ELTA is not the only source of funding for these education programs.

In general, capital gains taxes are volatile and hard to forecast, which makes sustainable budgeting more difficult. To address such volatility, states that tax capital gains should maintain higher levels of reserves than they otherwise would. Nevertheless, Washington’s capital gains tax statute was designed so that it does not feed into the constitutionally-protected rainy day fund.

The capital gains tax is currently targeted at a relatively small number of wealthy individuals, but the tax rate, standard deduction, and exemptions could all be changed in the future with a majority vote of the legislature.

Read the report here.