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Weekend vote expected in state Senate on controversial capital gains tax proposal

The Capitol Building in Olympia. (AP Photo/Ted S. Warren, File)

Child care; education; COVID-19 relief; rental assistance; affordable housing; wildfire prevention; climate goals; transportation; behavioral health: There is no shortage of pricey asks from majority Democrats and Governor Inslee in the 2021 legislative session.

State lawmakers continue bid to tax state’s wealthiest residents

Despite the economic damage from the pandemic not being near as bad as originally thought, and revenues coming in well above projections, Democrats are aggressively pushing a series of new taxes, including a wealth tax, a soda tax, and the always controversial capital gains tax.

“We’re 50 out of 50 states in tax fairness and I don’t think we should wait any longer than we need to, to help middle class and working class families to have some better tax equity in this state,” said state Senate Majority Leader Andy Billig during a recent media briefing.

Heading into session there were two proposals for a capital gains tax, HB 1496 in the state House, and another in the state Senate, SB 5096, requested by the Office of Financial Management, which has more traction and is likely to get a floor vote this weekend.

Sponsored by Democratic Sen. June Robinson, SB 5096 originally would have been a 9% tax on gains from the sale of things such as stocks, bonds, and other assets above $25,000 for individuals, and $50,000 for couples. That would have affected about 42,000 tax payers and brought in about $975 million in the first year, according to the OFM.

But when the bill cleared Ways and Means last month, it was reduced to 7% tax on gains of $250,000 for individual and joint filers, along with several other changes, such as excluding the sale of all real estate and creating an exclusion for a “qualified family-owned small business.” Revenue from the tax would be split with the first $350 million collected a year placed in the Education Legacy Trust Account and the rest into the Tax Payer Relief account, with no specifics on how those dollars would be used.

In its edited form, it is expected to bring in about $550 million a year.

But Robinson has attached another amendment that makes several changes, increasing the gross income threshold to qualify for the small business deduction, and eliminating the maximum number of employees allowed to qualify for that deduction. It also changes the distribution of the revenue collected, depositing the first $350 million into the Education Legacy Trust Account, $100 million into the general fund, and the remainder to the newly created Taxpayer Fairness Account.

Is this actually an income tax?

Critics argue the tax is illegal.

“Look, we think this is very clearly an income tax. I mean, it says income tax in the bill over a dozen times. The IRS thinks this is an income tax, every other state in the union that has this sort of tax calls it income tax,” said Senate Minority Leader John Braun.

Former Washington AG: Capital gains tax is income tax in disguise

“It’s a graduated income tax that they’re proposing, and we have long standing constitutional court precedent that says that’s not allowed in our state,” he continued. “So, not surprising, we’re disappointed they continue to try to push forward a tax that doesn’t comply with our state’s constitution, then to add to that, we have (voters) in one form or another rejecting it 10 times over. It’s really part of our culture in Washington state, we do things different here. One of the things we do different is we don’t have an income tax.”

Democratic Rep. Noel Frame and others have stated they fully expect the tax to be challenged in court should it pass, but believe that’s merely the first step toward getting through the legal barriers to prove this is an excise tax and not an income tax, and then see what they have to work with to create a more balanced tax system.

Robinson flat out states in the bill that it is an attempt to rebalance the tax code.

Republicans don’t buy it.

“They will talk a lot about regressivity, I would tell you, there’s a lot of better ways, frankly, to address regressivity than to just to pass a tax. This is just an ideological thing. We know for a fact, unquestionably, we do not need the money this year and so the only reason to do it is ideology,” said Braun, pointing to an emergency clause in the legislation as particularly problematic.

“There’s no emergency here in this bill — the emergency clause is simply to keep people from voting on this bill, and it is egregious that they continue to push to include it,” he added.

Sen. Billig disagrees, noting earlier in the week that “we do have an emergency.”

“We have an emergency when it comes to child care, and we have an emergency when it comes to tax fairness, and that’s the reason (the emergency clause is) there,” he outlined. “I’m sure that there will be an amendment to take it off. So we can have a public, open, transparent debate about it on the floor of the Senate, and then the body representing every district of the state will make a decision.”

Republican Senator Lynda Wilson argued the better-than-expected revenue picture expected in just over a week is evidence our current tax system is working.

“We are one of a few states that did move forward instead of going backwards and winding up in a hole,” said Wilson at Thursday’s Republican media briefing, where she also took issue with some Democrats’ comments about passing the tax to get it to court.

“We have over 85 years of precedents from our Supreme Court telling us that it is property and therefore it would be an income tax, which would therefore make it unconstitutional,” she continued. “So we will have a very expensive court case that could last a year or two, that the taxpayers have to pay, and then, ultimately, we know where they’re going with this and that they want to have this structure set up so that we can have a full-blown income tax.”

A push for racial equality

Democratic Rep. Melanie Morgan has a different take, admitting that some of what the majority party does may seem regressive, but suggesting a big-picture outlook.

“We do have to remember that we saw the disparities in terms of communities of color that were affected by COVID,” said Morgan, noting how that was something the community dealt with long before COVID.

Opinion: History of Washington’s income tax shows why we need it

“If we are truly going to be inclusive, and practice racial equity, in terms of making sure that all communities get services, and resources, and vaccines properly, then everybody’s going to have to pay their fair share,” she added.

The bill is somewhat vague about how funds in the newly created Taxpayer Fairness Account will be used, but prior to the 2021 session, one prominent Democrat offered a theory on a capital gains tax and how to use it to make the system more fair.

“Because the revenue is pretty volatile from capital gains, you don’t spend more than the part that you could count on in the worst year, and instead, you put the sort of excess revenues from it toward reducing property taxes statewide,” Democratic Senator Jaime Pedersen explained, suggesting if the tax collection range was between $400 million and $1.2 billion, then you only spend that $400 million while setting aside the other $800 million in a special account.

“And then you’d use it the following year to reduce the aggregate property tax collection in the state,” Pedersen continued. “Instead of having it be $2.70 per $1,000 of assessed value, maybe it could be $2.45, or something like that, and then you have all the county auditors put a notice on the bill, that here’s what your tax would have been for the state, and then here’s the deduction because of capital gains revenues. Suddenly, 23,000 very rich people pay capital gains tax, and 3.3 million taxpayers get a lower property tax bill.”

It is not clear whether that is a possible outcome with the current bill.

Follow Hanna Scott on Twitter or email her here

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