“Whatever the concerns on the volatility of the capital gains tax, the alternative is zero,” Inslee said.
That rather misses the point. Setting aside the question of whether the Legislature needs to raise more revenue, a capital gains tax would be an especially questionable method because of its volatility. As Stateline notes,
The problem with tax stream volatility, according to Don Boyd, analyst with the Rockefeller Institute of Government, is that “it’s no way to run a government.”
“What does state and local government spend money on? K-12 education and health care for the elderly and very disabled,” he said. “When the revenue goes down, you don’t have a drop of kids in school and you don’t have a drop in elderly health treatment. You have to provide those services even when revenue falls off dramatically.”
Governments need revenues to be as predictable and stable as possible (Washington happens to do fairly well on this currently) — for the sake of clients who depend on them. Relying on a volatile revenue stream like a capital gains tax means that there could be huge swings in the amount of services that can be provided year to year.
Zero new revenues but stable provision of services might be preferable to a situation where uncertain revenue streams require periodic, unexpected cuts in services or increases in tax rates.