Is the capital gains tax alive or dead?

Meanwhile, a committee of heavyweights on the left forms to defend the tax

Paul Queary

Apr 6, 2022

So there have been some interesting incremental developments in the two-ring circus that is the fight over Washington’s new capital gains tax.

But first, a disclaimer: I’m mostly writing this because it offers a unique opportunity to reference both Schrödinger’s Cat — a mind-bending thought experiment from quantum mechanics — and Exploding Kittens — a really entertaining party game with disturbing illustrations that evoke the great Ralph Steadman.

We last wrote about the capital gains tax a couple of weeks ago when the legit

ballot measure to repeal it appeared. Since then, Judge Brian Huber out in Douglas County has issued his formal order declaring it unconstitutional, and Attorney General Bob Ferguson’s crew swiftly appealed, seeking direct review by the Washington Supreme Court. (If you want to dig into the legal argument, we’ve got you covered.)

That prompted the brainy folks who work for the Washington State Economic and Revenue Forecast Council to pose this interesting question for the council itself last week: Do you want the forecast to include the revenue that the tax would generate if Huber’s ruling is later overturned? (The Forecast Council is a panel of leaders on matters budgetary and fiscal that are charged with agreeing on how much money the state has to spend.) Whether or not to include the capital gains tax makes about a $731 million difference in the state’s four-year budget outlook.

This is where we get to Schrödinger’s Cat: In that experiment, the cat is trapped in a closed box with a radioactive booby-trap that may randomly kill the cat at any moment.

One interpretation of quantum mechanics implies that the cat is simultaneously alive and dead after a while. Of course, if you open the box, the cat will be either alive or dead.

Rep. Ed Orcutt, R-Kalama, an opponent of the capital gains tax who has a seat on the Forecast Council because he’s the ranking minority member of the House Finance Committee, made the cat-is-dead argument. The money should be left out because the law is unconstitutional unless Huber gets overturned.

Here’s where we get to Exploding Kittens: One of the most entertaining elements of that game is the “nope” card, which invalidates the previous card played by your opponent.

It’s given rise to the use of nope as a verb, which we strongly support here at the Observer.

In this case, Senate Ways and Means Chair Christine Rolfes noped Orcutt, essentially arguing that the tax’s fate was still unknown — the cat was still inside the box, perhaps alive — because the real decision over its fate rests with the Supremes. One of the reasons to pass it in the first place was to give the folks in the black robes a chance to toss out nearly a century of rulings barring income taxes.

One of the ways you win at Exploding Kittens is by stockpiling nope cards.

That’s how Rolfes, D-Bainbridge Island, prevailed here because the deck at the Forecast Council is stacked with Democrats. Along with Rolfes and House Appropriations Chair Timm Ormsby, who is also chair of the Forecast Council, the panel includes David Schumacher, Gov. Jay Inslee’s budget director; State Treasurer Mike Pellicotti, a Democrat; and Vikki Smith, director of the Department of Revenue, an Inslee appointee. The only other Republican is Sen. Lynda Wilson, R-Vancouver, the ranking member on Ways and Means.

Smith recused herself because she’s named in the lawsuit and Wilson wasn’t at the meeting, but Orcutt’s motion still failed. This is an illustration of why it’s a bad idea to run Loren Culp for governor. Elections have consequences.

So here’s why all this philosophical and legal hair-splitting is important: The Supremes take their own sweet time to rule on things, so it’s likely that the voters get to weigh in first via the ballot initiative. And keeping the cat alive opens up a new tactic in that campaign.

A new law passed by the Legislature and signed by Inslee last month requires that initiatives with a negative impact on the state’s services — like repeals or reductions of taxes — carry a brief summary of that impact on the ballot. If it were applied to the capital gains tax repeal, it would say something like: “This measure would reduce state spending on education and child care.”

The idea is to end Washington’s long history of offering voters a tax cut via initiative without acknowledging what the money pays for.

But if the capital gains tax is is unconstitutional and left out of the revenue forecast — if the cat is declared dead inside the box — then the initiative has no fiscal impact. It’s merely excising some dead language from state law.

Now, it’s early days on this. The attorney general’s office hasn’t even coughed up a ballot title yet. You can probably count on lawyers at dawn over the language when it does. Before we move on, one last card from Exploding Kittens, because cats always win in the end:

In other capital gains news, money and muscle on the left

Political committees are frequently named something mendacious and misleading like “People for Good Governance,” when there are few actual people involved and little good governance envisioned.

But this issue has given rise to some unusually straightforward names. The yes campaign on the repeal is called “Repeal the Capital Gains Income Tax,” which encompasses both mission and message. Now we get the no campaign: “No Tax Cut for the Super Rich.” We speculated a while back on where the money would come from, and we always enjoy being right:

While the committee hasn’t reported raising any cash yet, (both sides owe monthly disclosures about March by next week) but some of the folks on the new committee work for the biggest spenders in Washington politics.

First up is Adam Glickman of the Service Employees International Union Local 775, which represents long-term care workers, who have won some of their greatest victories in initiative campaigns. Much of the money to pay SEIU 775’s members comes from the state, which makes them passionately interested in growing the state’s revenue. The union is currently sitting on $4 million in its ballot fund.

There’s Djibril Diop of the Washington Education Association. As we’ve reported, the teacher’s union is the single biggest player in Washington State politics, moneywise, not to mention more than 80,000 members. Teachers likewise get most of their money from the state. They’ve been to the ballot before and come away winners.

And finally, there’s Zach Silk, who runs Civic Ventures, the political operation of Nick Hanauer, one of the millionaires and billionaires who fuel the Washington State Democratic Party and various progressive causes. Silk’s presence here is particularly noteworthy; he made his bones in progressive politics by fighting off an initiative that would have repealed the Legislature’s vote to legalize gay marriage back in 2012.

We’ve noted before that the opponents of the tax have some of the best hired-gun operatives money can buy. This will be a fight worth watching.

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Because we’re all about the cats today

Arya has the day off. Meet Remy, who’s really the boss around here. The shaved patch on his hindquarters is the expensive veterinary result of a scuffle with some neighborhood ruffian, whom we assume looks much worse.

Steadman, we were delighted to learn, is still alive and drawing in the U.K. He is best known for his collaborations with Hunter S. Thompson, particularly on “Fear and Loathing on the Campaign Trail,” their satirical account of the 1972 presidential campaign. Like all political journalists who like to color outside the lines, I owe them both a great debt.

There’s a crowd of wannabes because filing an initiative only costs five bucks. Keep your eye on Initiative 1929, which has the financial muscle behind it to reach the ballot.

We of course do not condone this treatment of cats. Although the dog gets most of the glory, we have two cats here at Observer World Headquarters. It’s their house, really; we’re just living in it.

Don’t ask me to explain it further; I failed the prerequisite for the prerequisite of that course.

Players frequently nope the nope, leading sometimes to the rare quadruple negative.

The endgame is frequently a nope-off.

Opponents of this argument point out that this debate is what the rest of the campaign — including the voter pamphlet — is for.