Governor Inslee has proposed that the state institute a 7 percent tax on capital gains. The first $25,000 of gains for an individual ($50,000 for a couple) would be exempt, as would all gains on a principle residence that had been owned for 20 years or longer. (For a few more details on the proposal see this fact sheet.)
As Dick noted last week, capital gains taxes are extremely volatile. A recent paper Yolanda Kodrzcyki, an economist at the Federal Reserve Bank of Boston, documents that the volatility of state personal income tax receipts increased dramatically in the 2000s compared to the 1980s and 1990s and that this was caused by increased volatility of capital gains:
[The] cyclical variability of personal income tax revenues increased markedly during [the 2000s]. This increase occurred because taxable capital gains became more cyclical and accounted for a higher share of overall adjusted gross income (AGI) on tax returns than in previous decades.
During the 1980s and 1990s Kodrzcyki estimates that a 1 percent increase in personal income was associated with a 2.21 percent increase in capital gains, while during the 2000s a 1 percent increase in personal income was associated with a 4.03 percent increase in capital gains.