Prior to American settlement, the tidal basin at the southern tip of Budd Inlet was a productive shellfish gathering area for native peoples.

The winning architects, Wilder and White, submitted a revolutionary City Beautiful movement and American Renaissance plan which included creating a body of water to reflect the Capitol Group of buildings on the bluff by installing a tidelock at the mouth of the Deschutes River.

A more limited lake was also part of the original landscape design by John Olmsted to reflect the Washington State Capitol building on Puget Sound.

[4] In 1947, due in large part by intense lobbying by Thurston County legislators, the state legislature approved funding for the construction of the dam in order to create Capitol Lake.

[9][1] In 2009, after 12 years of intensive and independently verified scientific study, members of the Capitol Lake Adaptive Management Plan (CLAMP) Steering Committee reached a consensus regarding the Department of Natural Resource's efforts to remove the 5th Avenue Dam and restore Deschutes Estuary.

A finalized report, in agreement with other government departments, several Thurston County Commissioners, and the Squaxin Island Tribe, officially recommended the Capitol Lake Basin be returned to an estuary.

The Washington State Department of Ecology released a report in 2012 that studied several areas of concern for the Deschutes River, Capitol Lake, and Budd Inlet, including bacterial and oxygen levels, sediment, and temperature.

Along with budgetary concerns, additional issues cited are the potential loss of economic activity on the waterfront and doubts that the water quality would improve.

[1] In response to the 2009 report, CLAMP noted that an invasive species, the New Zealand Mud Snail found within the lake, are recorded at such high quantities that their potential to cause "unpredictable environmental degradation" suggests that their release into the Southern region of the Puget Sound should be avoided at all costs.

[10] In 2009, the New Zealand mud snail (Potamopyrgus antipodarum), an invasive species the size of a grain of rice, was discovered in Capitol Lake.