The state treasurer issued a press release last week highlighting Washington’s strong credit rating and the impact on savings tied to the bond sale. The Treasurer said this about Standard and Poor’s (S&P) credit rating for the state:
“S&P Global Ratings affirmed its long-term and underlying ratings, characterizing Washington’s credit profile for its strong fiscal management practices, including strong forecasting, a track record of timely fiscal adjustments adapting to changes in forecasts. S&P, Moody’s and Fitch are today the three largest rating agencies. These agencies assess the creditworthiness of private companies and governments around the world.
Another thing that S&P says is a credit strength to Washington is the relatively low volatility of our tax revenues due to the absence of state income taxes. S&P said:
“The ratings reflect our view of Washington’s sales-tax-based revenue structure, which has demonstrated less sensitivity to economic cycles than income-tax-dependent states…”
Although there is no recession-proof tax structure, Washington has consistently ranked as having relatively stable tax collections compared to other states. The reason for this is that Washington’s three main tax sources (sales, gross receipts, and property) are among the least volatile taxes. Progressive income taxes, however, are the most volatile taxes. The worst of these for volatility are capital gains income taxes.
The extreme volatility of capital gains taxes is well known to tax practitioners. When issuing the Washington Bonds credit rating in August 2019, Standard & Poor’s noted:
“Washington’s incomes have always been less cyclical than others (due in part to the absence of personal income taxes). . . we have observed that capital gains tax revenues are among the most cyclical and difficult to predict revenues in many other states. »
The Washington Department of Revenue also warned in 2012:
“Capital gains are extremely volatile from year to year.”
It’s also important to remember that the state Department of Commerce has previously said that having a capital gains tax “is great marketing” for Washington. Commerce warned in 2018 that imposing a capital gains tax would mean “one less tool than we have in our economic development toolbox”.
Although it recently deleted any mention of no state income tax from its “Choose Washington” webpage, here’s what Commerce previously said on the site:
- December 13, 2012: “We offer businesses competitive advantages found in few other states. These do not include any capital gains or personal or corporate income tax. We also offer industry-specific tax breaks to drive innovation and growth where possible. »
- May 1, 2015: “We offer businesses competitive advantages found in few other states. This does not include any personal or corporate income tax. We also offer industry-specific tax breaks to drive innovation and growth where possible. – You’ll notice that the reference to no capital gains tax has been removed (here’s what Commerce then said when asked why).
Despite recent changes to the website, Commerce still does not make any state income tax pitches to employers during direct presentations using this:
S&P claims that no income tax is a credit strength for Washington, and Commerce has advertised it as a competitive advantage. Let’s hope the state Supreme Court doesn’t spoil a good thing with the capital gains tax lawsuit, especially since voters have been very clear about their opposition to the income tax. .