Local Polls and Tossed-Towels: Political Shift Toward Taxing the Very Rich

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Capital Gains Tax by Nick Youngson CC BY-SA 3.0 Pix4free.org

Sometimes in politics it’s the dog that doesn’t bark that speaks the loudest. 

Such may be the case with the unexpected fizzle of the much-anticipated, statewide, big-dollar ballot measure campaign (Initiative 1929) that was supposed to wipe out the capital-gains tax passed by Democrats in Olympia. Capital-gains opponents, drawing from the ranks of the very wealthy and the venture-capital community, spent more than a year laying the groundwork for a repeal initiative that never ended up gathering a single signature. 

That fizzle may turn out to be, in its own quiet way, the most meaningful and consequential political development in Washington state this year. 

It’s hard to overstate how surprising the capital-gains-tax opponents’ decision – which became official last month – is to throw in the towel. Six months ago, everyone in Washington state’s political world was anticipating a massive, multi-million-dollar ballot battle in 2022 pitting some of Washington’s wealthiest residents against deep-pocketed labor unions and progressive organizations. The establishment of the tax had been the top left-progressive political priority in Olympia for more than a decade. After years of stalled attempts and setbacks, advocates for progressive taxation (and increased public revenue) finally leveraged Olympia’s large Democratic majorities to break through in the 2021 session.  

Washington state’s version of capital gains imposes a 7 percent tax on the profits from sales of mostly stocks and bonds (real-estate profits and retirement accounts were exempt) above $250,000. The tax is estimated to generate more than $400 million in annual revenue when implemented.

Opponents cried foul, but during the legislative debate capital-gains proponents used a full court lobbying press that convinced Olympia Dems to attach an emergency clause to the tax, which shielded the tax from being subject to an immediate repeal referendum. With that referendum option off the table, opponents made it clear they would proceed on two tracks: challenging the legality of the tax in the courts, while pivoting towards an initiative campaign to wipe out the tax at the ballot. In December 2021, almost a full year ahead of the 2022 election, opponents filed the “Repeal the Capital Gains Income Tax” campaign committee, which quickly started reporting initial $50,000 and $100,000 contributions from major donors. They also secured the services of a top-tier national ballot measure consultant, conducted polling, drafted a measure, and then fought in court to amend the ballot language. 

Most observers at that point, myself included, believed the battle was on, and that capital-gains-tax defenders were facing an uphill battle to preserve the tax. As it turns out, the pro-tax folks would end up winning the battle before it even started, at least for now. 

The backers of I-1929 spun their stand-down decision on the initiative as a strategic calculation to let the parallel legal battle over the tax play out before engaging in a costly ballot fight. Tax opponents privately claim that the stand-down decision is more a temporary pause than a sign of surrender, citing the extraordinarily high cost of collecting signatures this year (due to shortages of gatherers). On the surface, that rationale seems plausible. After all, in March opponents won a ruling from a lower court judge in Douglas County declaring the capital-gains tax an income tax, unconstitutional under current Washington state legal precedents. An appeal of that ruling could be taken up by the state Supreme Court sometime next year. 

Moreover, the cost of collecting the approximately 405,000 plus signatures needed to ensure qualification was indeed astronomically high this year. Collecting enough signatures to qualify would have cost at least $5 million and perhaps significantly more. Just about a week ago another big ballot measure effort to decriminalize drug use, spearheaded by the ACLU, abruptly threw in the towel after gathering costs ballooned. That effort had already spent more than $2.7 million on gathering, and had reportedly only amassed half the needed signatures.

Still, there’s no question that the failure to move forward was a major – and unanticipated – setback for capital-gains opponents. They clearly intended to go to the ballot this year, until all of a sudden they didn’t. As weeks went by without signature gatherers hitting the streets, it became increasingly apparent that opponents of the tax were having trouble raising enough money to qualify their measure. Campaign fundraising totals had only reached a woefully inadequate $702,750 when opponents gave up. Meanwhile, capital-gains defenders had $979,000. Plus, evidence was mounting that they were likely facing an uphill battle to win at the ballot. Polling released by their opposition in May showed the measure polling surprisingly poorly.

If the multiple rounds of polling conducted by capital gains defenders is accurate – I-1929 backers say their internal polling was much more positive, but none of that data has been shared publicly – it indicates a real increase in voter support for taxing the wealthy. 

Despite Washington state’s reputation as a blue bastion, the history of efforts to make our highly regressive tax code more progressive has largely been a story of struggle and setback. On three occasions, Tim Eyman has successfully passed initiatives requiring a two-thirds supermajority in the Legislature to pass tax increases, though all were later wiped out by the Legislature and the courts. After an initial success of a progressive income tax measure at the ballot in 1932 (struck down soon after by the state Supreme Court), multiple times since the 1930s efforts to win voter approval for an income tax have gone down in flames. The most recent effort was Initiative 1098 in 2010, a high-earners income tax proposal that Washington State voters defeated by a nearly two-to-one margin [disclosure: I consulted on that campaign, and I retain the psychic scars to prove it]. 

But something significant appears to have shifted over the last 12 years when it comes to voter perceptions of tax measures aimed at the wealthy in Washington state. Polling of the final ballot language released in May by the coalition supporting the capital-gains tax – which included the Washington Education Association, the Washington Federation of State Employees, the Service Employees International Union, Civic Ventures (progressive venture capitalist Nick Hanauer’s political and policy shop), and a host of other progressive groups – showed I-1929 garnering only 32 percent support (with 50 percent of voters starting out opposed). That’s a shockingly weak starting point. 

Behind the scenes, tax proponents had made a number of savvy strategic and tactical decisions that helped to put them in this strong position. First, learning from the failure of the I-1098 campaign a decade ago, they limited the scope of the tax, exempting retirement accounts and all property sales, including second homes. This cost them a lot of potential revenue, but it also ensured that only a small number of very, very wealthy Washington state residents benefiting from large-scale sales of securities would face any significant tax liability. By contrast, the architects of the 1098 high-earners income tax had gone in the opposite direction, crafting a massive $2 billion tax measure that impacted the moderately wealthy as well as the super rich. 

In the end, it may be that there simply weren’t enough oxen getting seriously gored by this version of a cap-gains tax to pony up the funding necessary for an effective opposition campaign. Those that did were quickly targeted with hardball negative “Wall of Shame” and “Save Our Yachts” social media and postering campaigns, their faces plastered in public areas around Seattle with text denouncing them as “GREEDY.” Knowing that they would be subject to a harsh reputational hit no doubt sidelined at least some potential high dollar donors who might otherwise have stepped up to bankroll the effort. 

In a particularly clever move, capital gains defenders also pushed through a little-noticed separate measure in the 2021 legislative session that for the first time mandated a brief “fiscal impact disclosure” be added to the ballot title for any tax-related initiative. With I-1929, that meant adding the line “This measure would decrease funding for education, early learning, child care and school construction” to the ballot title. The language voters read on the ballot can have a major impact on how successful that measure is. In this case, proponents’ polling showed the addition of this short sentence created a 15 point net shift against the measure among voters. That is really significant. Without the fiscal impact statement, the cap-gains repeal started in a much better place, trailing much more narrowly, with 40 percent in support and 43 percent opposed (still, any measure starting below 50 is likely in trouble).

On the other side of the coin, opponents of the tax made some questionable campaign decisions. Rather than broadly framing their initiative as a ban on “income taxes” (and then defining the capital gains tax as an income tax in the measure’s fine print), they went with much narrower ballot language that focused specifically on the capital gains tax. Eyman and conservative grassroots activists sharply criticized this approach, releasing some polling showing (unsurprisingly) that an anti-income tax measure (defined to include the capital gains tax) would perform much better at the ballot. I’ve been told that I-1929 backers chose the approach they did because their lawyers cautioned them that the broader formulation would open them up to a strong legal challenge were the measure to succeed at the ballot. That is a reasonable concern, as the courts have repeatedly struck down Eyman’s successful ballot measures for addressing multiple subjects in the same measure or for other legal defects. Still, this decision saddled opponents with a measure that came out of the gate polling weakly and likely to fail.

But the failure of I-1929 is rooted in more than some strategic successes and missteps by the two campaigns. Beyond the polling circulated by cap gains defenders, there are other indications that the Washington state electorate may now be more receptive to “tax the rich” messages than they were a decade ago. 

In large part, this is – somewhat counterintuitively – a function of the rise of MAGA populism on the right. Trumpism is not just about owning the libs or heightening the anxieties of small town and rural whites over cultural and demographic change. It’s also about overthrowing the old laissez-faire corporatist Republican establishment, where wealthy donors and business titans had the power to shape the party’s agenda in ways that privileged their priorities over those of the rank and file. (One example: pushing for cutting taxes in ways that disproportionately benefit the wealthy.) The Trumpian assault on the Republican old guard has triggered a surging belief on the right that monied elites have rigged the system to screw the little guy. A few years ago this sort of class-based economic populism only had traction on the Bernie Sanders left. Now there is a populist class warfare strain running through the whole country.  Trump and Sanders are in some ways two sides of the same coin, united in building political support by coalescing anger (albeit in different ways and to different ends) at the perceived privileges and power of the rich. 

The pro-cap-gains side conducted focus groups that they say starkly captured this shift. While support for taxing the wealthy has deepened somewhat on the left, particularly revealing, I’m told, were the focus groups they conducted with self-described tax-sensitive independents and conservative-leaning voters living in Pierce and Snohomish Counties. Participants in those groups expressed strong beliefs they were paying too much in taxes in large part because the wealthy weren’t paying their fair share. Particularly in blue collar Pierce County, traditional Republican “job creator” or trickle-down arguments didn’t land well even among these conservative, tax skeptical voters. 

That’s a big change from the past. The first statewide campaign I worked on, back in 2006, was a successful defense of the state estate tax. Tax data showed that only the top half of one percent of estates would be subject to the tax, but our initial polling showed that more than 40 percent of voters believed they would pay it. Additionally, political arguments attacking the wealthy didn’t play well outside of the most liberal voters. 

That old wisdom has apparently shifted in recent years. Regarding the attitudes voiced by the Pierce/Snohomish focus group participants, “’The swamp’ for them is a lot of the [very wealthy] people that were backing the [capital-gains] repeal,” one pro-cap gains insider told me, adding that in all of these focus groups, a majority of the participants ended up opposed to repealing the tax. 

That’s a significant change from how these voters would have reacted a few years ago. But it’s important not to overstate the scope of this shift. For one thing, a broad income tax remains a political third rail with Washington state voters, and there’s private polling besides Eyman’s which shows that. But cap-gains proponents say that voters did not see the capital gains tax as the same as an income tax; focus group participants showed a surprising level of understanding that the way the wealthy earn much of their income is through the sales of stocks and bonds, and that they didn’t pay much in taxes on those sales. As a result, they saw the capital-gains tax as a way of socking it to the privileged and advantaged rich without it rebounding back on them. 

That said, don’t assume the fight is over. If our very liberal-leaning state Supreme Court decides to overturn the lower court ruling and uphold the legality of the capital-gains tax, which is probably more likely than not, it’s possible that opponents will come back in a year or two – when campaign costs would presumably be lower – with a revived repeal measure. As mentioned earlier, they claim their polling is very different from the numbers that capital-gains defenders released. 

Nonetheless, their decision to pull the plug this year has to be understood as a major win for Washington state’s movement left. After years of falling short, they’ve not only succeeded in passing a major new progressive tax, but also now have good reasons to believe it will stick. 

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Sandeep Kaushik is a political and public affairs consultant in Seattle. In a previous life, he was a staff writer and political columnist at the Stranger, and did a stint as a Washington State correspondent for Time Magazine and for the Boston Globe, back in the olden days when such positions still existed.

8 COMMENTS

  1. Implementation of the tax is a good thing as opposed to a state income tax and the rich know it. The writing was on the wall when the addition was allowed of the following.
    “This measure would decrease funding for education, early learning, child care and school construction”

  2. The ‘super rich’ are villains in need to being punished for their resourcefulness and success, is that the main message of this op-ed?

    In other news, major private-sector entities are fleeing California and Illinois and New York because of hostile government interventions and anti-prosperity business environments. Washington State runs the risk of running successful enterprises off too, envy and resentment satiated!

    • @ Glycine Bienne:

      Sandeep produces a detailed, nuanced explanation of why “tax the rich” isn’t the boogeyman it used to be in Washington, even citing some evidence that this phenomenon extends to conservative populists, and your response is to trot out the senile, decrepit boogeyman of “businesses fleeing hostile tax environments,” without citing a scrap of evidence that this is happening, or has happened? Pretty Pavlovian, I’d say.

  3. Hoping very much that the income tax question reaches the Washington State Supreme Court. Now that stare decisis is dead, there’s no reason for them not to reconsider the bizarre 1932 income tax is property tax ruling.

    • I know that’s the tax reform activists’ holy grail, but I am pretty sure it’d turn into a political disaster for Team Progressive Taxation. It really would make it possible for the anti- side to run an anti-income tax ballot measure, which would likely win overwhelmingly, and likely would boost Rs over Ds in the process. While public sentiment around a capital gains tax may have shifted, along with “tax the rich” attitudes more generally, that doesn’t extend to public support for an income tax. As I mentioned in passing in the piece, the (not unreasonable) threat that an income tax that starts out on the wealthy would over time be extended to middle class taxpayers by revenue-hungry Democrats is a powerful negative message that turns WA voters against an income tax.

      • I’d rate the current capital gains tax equal to the current Seattle head-tax or “jump-start” tax. It’s reasonable and the local Captains of Industry are fine paying it and we benefit from it.

        The trouble is, can the Seattle Left leave well enough alone? Increasing the capital gains tax or jump start tax very well might change the political equation. I don’t trust the Left not to kill the Golden Goose here.

  4. I still like exploring the idea of a compromise, which is a high-threshold flat-rate income tax. This gets around the legal problems with a graduated tax and by setting the floor for the tax at, say, $50,000 per individual, you make the tax more progressive. Another incentive for this breakthrough would be to couple the new tax with reduction of some other bad taxes, such as the B&O tax. And also to earmark the flat-rate income tax to some targeted social goals, such as mental health and climate change.

    • My understanding is that there are some substantial legal impediments to setting a reasonable threshold for exempting lower income people from a flat rate income tax.

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