Martin Falbisoner / Wikimedia Commons
Why It Matters
Washington state’s finances received a significant short-term boost after capital gains tax collections came in far above projections, temporarily closing a gap that threatened to disrupt state programs. But budget officials and lawmakers on both sides of the aisle warn the relief is fleeting — and the deeper structural mismatch between government spending growth and available revenue remains unresolved heading into the next budget cycle.
What Happened
A revenue forecast released Friday showed Washington collected $1.5 billion from its capital gains tax — roughly double what forecasters had anticipated back in February. The surge effectively offset a projected $878 million deficit set to begin with the fiscal year starting July 1, providing temporary breathing room for state budget writers.
The good news, however, came with a significant caveat. Other tax sources declined by $423 million from the February forecast, meaning the windfall from capital gains masked deteriorating performance elsewhere in the revenue base.
Washington’s capital gains tax levies a 7% rate on profits from the sale or exchange of long-term capital assets, including stocks, bonds, business interests, and certain tangible assets. Real estate transactions are excluded. In 2025, gains between $278,000 and $1 million were taxed at 7%, while gains above $1 million faced a 9.9% rate. The state’s Department of Revenue reported 9,050 net filer payments for 2025, a relatively small pool of taxpayers generating an outsized share of the state’s revenue.
Capital gains tax revenues flow into state accounts dedicated to schools, early learning, and child care programs. Collections above $500 million are directed toward school construction and renovations — though that provision has been paused for the current budget period and is not set to resume until July 1, 2028, unless the legislature takes action beforehand.
By the Numbers
- $1.5 billion collected from capital gains tax — roughly double February projections
- $423 million decline in other tax collections since the prior forecast
- $76.2 billion projected for Washington’s economy during the current two-year budget, a $961 million increase from February
- $82.2 billion estimated available for the 2027–2029 budget, up $1.8 billion from earlier estimates — largely driven by a new statewide income tax on high earners
- 9,050 net capital gains tax payments filed for 2025
Warnings From Both Sides
Democratic and Republican members of the Economic and Revenue Forecast Council acknowledged the numbers were deceptive in their optimism. Sen. June Robinson, D-Everett, put it plainly: “It’s a mixed bag, I would say. We obviously have very positive revenue with the capital gains tax for the very short term. If you took that out, the forecast is generally down.”
K.D. Chapman-See, budget director for Gov. Bob Ferguson, echoed that concern, saying the capital gains collections “are a helpful addition but the underlying fundamentals of our budget are still going to be very challenging.”
Ferguson, who has signaled he intends to avoid new taxes in his December budget proposal, is expected to rely heavily on spending cuts — potentially targeting programs created since 2019 — as program costs continue rising faster than tax revenues. That approach will likely require difficult choices as the state heads into the 2027–2029 cycle.
Zoom Out
Washington’s budget picture reflects a broader tension in Pacific Northwest and Mountain West states that expanded government services significantly during the post-pandemic revenue surge, only to find those commitments increasingly difficult to sustain as growth normalizes. The reliance on a narrow base of capital gains filers for a large portion of revenue also creates inherent volatility — market downturns or shifts in asset sales can rapidly erase projected surpluses.
The state is also navigating the early stages of a new economic development strategy launched by Governor Ferguson amid slow growth concerns, while the broader Washington jobs market shows mixed signals with unemployment holding at 5.2% even as payrolls expanded in May.
A statewide income tax on high earners included in the 2027–2029 budget framework is projected to add roughly $2.3 billion in offset revenue, though that provision faces both court challenges and the possibility of a ballot referendum before collections begin in 2029.
What’s Next
The current budget runs through June 30, 2027. Governor Ferguson is expected to release his proposed budget in December, which he has said will contain no new taxes and will focus on cuts. Lawmakers will then face a legislative session tasked with closing a structural gap as spending growth continues to outpace revenue — with or without another capital gains windfall to paper over the shortfall.
About the Author
