Washington state legislators face a serious budget problem due to overspending and a court-ordered mandate to increase education funding. In response, Gov. Jay Inslee (D) has proposed a $39 billion budget that would add $1.4 billion in new revenue generated by three major tax hikes: a new capital gains tax, a cap-and-trade carbon tax system, and a tax increase on cigarettes and e-cigarette vaping products. These taxes will have widespread effects on the state’s economy and taxpayers and will likely fail to meet revenue estimates.
Capital gains tax hikes have been popular in many states because they are perceived to apply only to wealthier taxpayers, leaving those with lower incomes unaffected. The tax would take 7 percent of earnings from the sale of bonds, stocks, and other assets greater than $25,000, beginning in 2016. Americans for Tax Reform notes the capital gain tax hike amounts to $798 million and will affect an estimated 32,000 taxpayers. Capital gains taxes are problematic because they suppress investment. Business returns on investment are often reinvested in new capital improvements, and workers benefit from productivity increases through increased wages and working hours. States lowering their capital gains taxes have enjoyed significant increases in venture capital and job growth.
The second major tax hike Inslee proposes is the cap-and-trade carbon dioxide tax, which Inslee says will generate $1 billion annually while reducing climate-altering emissions. Carbon dioxide taxes are regressive: By increasing the cost of electricity, these taxes place a higher burden on poor and middle-income households. Taylor Smith of The Heartland Institute notes a carbon dioxide tax “would have a lesser chance at success at the state level than nationally, because manufacturers have greater mobility between states. Hence, state carbon taxes are a particularly risky strategy for generating revenue, while producing globally insignificant emissions reductions.”
The Inslee budget also creates significant new taxes on cigarettes and vaping products. Inslee would increases state cigarette taxes by 50 cents, making Washington’s cigarette tax the nation’s second-highest, behind only New York. The governor also has proposed a 95 percent tax at the point of sale on e-cigarettes and vapor products sold in Washington.
Cigarette taxes, like all sin taxes, are unreliable as a revenue source and encourage smuggling and other illegal actions. Sin taxes distort the market and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers. E-cigarettes have proven effective at helping smokers reduce their cigarette use or quit altogether. Adding new taxes would remove a valuable economic incentive for smokers trying to quit.
Washington does not have a revenue problem; it has a spending problem. Inslee’s $39 billion 2015–17 budget plan would boost state spending by $5 billion and result in the largest increase in new tax dollars in state history. Instead of imposing billions of dollars of new taxes, Washington legislators should implement tax reforms and education system reforms that encourage economic growth and keep the state competitive with its neighbors.
The following articles examine Inslee’s tax hike and each individual component.
Gov. Inslee’s 2015–17 Budget: Where “Extremely Volatile” and “Unpredictable” become “Secure” and “Stable”
The Washington Policy Center (WPC) examines Gov. Inslee’s 2015–17 budget and criticizes his claims the hikes will have few negative effects on the state’s economy. WPC notes many of the proposed taxes are highly volatile and unpredictable: “In a state that budgets for a two-year period and is required to project being balanced over four years, ‘extremely volatile’ and ‘unpredictable’ do not seem to be the best building blocks for a solid, fiscally sound, secure and stable budget.”
Research & Commentary: Capital Gains Taxes Update
Matthew Glans and John Nothdurft of The Heartland Institute examine a proposed hike in the federal capital gains tax rate and its expected effects on investment and the economy: “An increase in the capital gains tax rate, combined with a hike in dividend taxes and high inflation, dramatically increases the effective tax rates paid by taxpayers. With the U.S. economy still struggling to crawl out of the economic downturn, it’s important to avoid policies hindering capital formation and investment in U.S. markets, as raising capital gains tax rates would do.”
State and Federal Individual Capital Gains Tax Rates: How High Could They Go?
The American Council for Capital Formation’s Center for Policy Research highlights the effects of increased federal tax rates on long-term individual capital gains when federal, state, and, in some cases, local taxes are combined. The study found a low capital gains tax rate is important in fostering economic growth.
The Effect of the Capital Gains Tax Rate on Economic Activity and Total Tax Revenue
The Institute for Research on the Economics of Taxation identifies how taxpayers and investors react to capital gains taxes: “The tax treatment of capital gains and dividends greatly affects the quantity of capital created and employed. The quantity of capital affects the productivity, wages, and employment of labor. Output and incomes are lower at higher levels of taxation of capital. Raising the tax rate on capital by increasing the tax rate on dividends and capital gains from current levels would shrink national income across the board.”
The Economic Costs of Capital Gains Taxes
The Fraser Institute outlines the effects of capital gains taxes: “Unfortunately, the cost of capital gains taxes is not limited to the amount of tax collected. Capital gains taxes impose additional costs on the economy because they reduce returns on investment and, thereby, cause individuals and businesses to alter their behaviour.”
Dissecting the Carbon Tax
Kenneth Greene, a resident scholar at the American Enterprise Institute, recounts how he was first deceived by the supposed economic benefits of carbon dioxide taxes and how his views have evolved, given the dubious track record of other eco-taxes being raided for general spending.
A Primer on the Economics of Carbon Taxes and Cap-and-Trade Systems
Jim Johnston, a retired economist and Heartland Institute board member, analyzes the pros and cons of the two most prominent government schemes to combat carbon dioxide emissions: cap-and-trade schemes and carbon taxes.
Heartland Institute Announces its Opposition to Carbon Taxes
Heartland Institute experts react to the bipartisan campaign to promote a carbon tax swap during the 2012 lame duck session of Congress, citing the poor track record of tax swaps, unaddressed spending problems, and the evidence against belief in an ongoing manmade climate change catastrophe.
Regulating, Taxing E-Cigarettes
Heartland Institute Senior Fellow Brad Rodu argues new taxes on e-cigarettes are likely and makes suggestions on how states should implement these taxes.
A Fresh Look at Tobacco Harm Reduction: The Case for the Electronic Cigarette
Riccardo Polosa, Brad Rodu, Pasquale Caponnetto, Marilena Maglia, and Cirino Raciti identify the health effects of e-cigarette use and consider the acceptability, safety, and effectiveness of this product as a long-term substitute for smoking.
Tobacco and Tobacco Products at a Crossroads in the 21st Century
Tobacco and health policy consultant Scott D. Ballin outlines several considerations he says must be part of the debate if further improvement in harm reduction is to continue.
Ten Principles of Energy Policy
Heartland Institute President Joseph Bast outlines the ten most important principles for policymakers confronting energy issues, providing guidance to help deal with ongoing changes in markets, technology, and policies adopted in other states, supported by a thorough bibliography.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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