Capital gains tax produced uneven receipts; staff showed large forecast revisions

Jeff Mitchell briefed the committee on Washington’s capital gains tax and the volatility in early collections.

Mitchell said the 2021 measure (read in the transcript as "gross substitute Senate Bill 5,096") established a 7% tax on the sale or exchange of long‑term capital assets and that the tax applies to individuals, with pass‑through entities potentially being implicated when individuals own interests in partnerships or LLCs. He said significant exclusions include a $270,000 per‑individual annual exemption (adjusted for inflation), a real‑estate exemption, and a deduction for qualified family‑owned small businesses.

The staff presentation recounted the tax’s early experience: the March 2023 forecast (done before collections arrived) estimated modest first‑year collections, but actual 2023 receipts substantially exceeded that forecast. The February 2024 forecast incorporated one year of actuals and was revised upward; after the second year of collections came in, actual receipts were about half of the February 2024 expectations, and the November 2024 forecast sharply revised revenue expectations downward. Under the latest forecast cited by staff, there was no anticipated amount flowing to the common school construction account.

Mitchell explained distribution rules: the first $525,000,000 per year from capital gains tax collections is directed to the Education Legacy Trust account (an operating‑budget account for K‑12, higher education, early learning and childcare); amounts above that threshold flow to the common school construction account (a capital budget account). Staff emphasized that the tax has only two years of collection history and that forecasts have moved considerably as the actual data came in.