Next week, Washington state voters will decide whether to repeal a new 9.9 percent tax on incomes over $1 million a year before it can take effect in 2028. The tax faced legal challenges almost immediately after it was enacted because Washington’s constitution has long been interpreted as prohibiting non-uniform taxes on income or property.
Similar challenges faced a new capital gains tax when it was enacted in 2021, but the state Supreme Court upheld the tax in 2023. Since then, taxes on capital gains have provided an important, but volatile revenue source for education in Washington state. The new tax on incomes over $1 million may provide a steadier revenue stream for recurring education costs.
Washington state uses taxes on capital gains to support education
Taxing capital gains is relatively new in Washington state. In 2021, the state imposed a 7 percent tax on realizations of long-term capital gains—profits from assets that have been held for at least a year— above $250,000.
In 2025, the legislature imposed an additional 2.9 percent surtax on realizations above $1 million. The first $500 million of revenues collected from these taxes go to the Education Legacy Trust Account (ELTA) to support public K-12 schools, early learning, pre-school education, special education, and community and technical colleges and to increase access to higher education. Revenues above $500 million go the Common Schools Construction Account (CSCA).
But capital gains realizations are volatile, and taxpayers can avoid paying taxes on them
Washington state’s Department of Revenue (DOR) found collections from the capital gains tax were $782 million in tax year 2022, fell to $395 million in 2023 and rose to $584 million in 2024. So far, $1.5 billion has been collected in 2025 (reflecting, in part, the new surtax). These swings illustrate the volatility of capital-gains-tax revenues.
The DOR estimates that the 2.9 percent surtax will affect about 900 Washington state taxpayers in 2025. But many of these taxpayers will realize gains large enough to be impacted by the surtax only once. As a result, revenues depend heavily on a small number of realizations that can vary substantially from year to year.
Research by Tim Dowd, Athiphat Muthitacharoen and me suggests that the realization of long-term capital gains are very responsive to changes in tax rates. Taxpayers can defer gains or hold assets until death. In some cases, they may be able to avoid the 2.9 percent surtax by realizing the gains over several years.
Taxpayers facing capital gains taxes can also migrate to lower-tax or no-tax states. Research has suggested that millionaires tend not to migrate for that reason, although more recent research has found larger responses, in particular to taxes on capital gains. While these responses wouldn’t eliminate most of the revenue, they add uncertainty to how much can be collected from a small number of taxpayers.
Washington state has more stable revenue options to support education
Washington state’s new tax on incomes above $1 million, if it survies the ballot measure and legal challenges, may provide a more stable revenue source for education because it applies to salaries, business income, and other sources that may fluctuate less than capital gains. Policymakers could then rely more heavily on income-tax collections for recurring education expenses and directing capital-gains collections toward reserves, construction, or other one-time costs.
Washington voters face choices about how to fund the state educational system. While taxes on capital gains realizations can raise substantial revenues, their volatility and the uncertainty of future income streams make them less suited to educational funding than broader and more stable tax bases.
