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State lawmakers OK controversial capital gains tax, court battle expected

The Washington state Legislative Building. (AP Photo/Ted S. Warren, File)

It’s been the hot topic since Washington Governor Jay Inslee requested a 9% tax version over $25,000 for individuals and $50,000 for couples in his budget proposal in December.

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Nearly five months later and after much heated debate, the Washington Legislature is again sending a capital gains tax to the governor’s desk, though different than his original version.

“Tonight we are finalizing another gigantic step towards rebalancing the tax code for working Washingtonians,” said Democratic Representative Noel Frame ahead of the House vote on Saturday.

SB 5096 would impose a 7% tax on capital gains above $250,000 for all to bring in an estimated $415 million in 2023, its first year.

According to the bill, the tax will be levied on “the voluntary sale or exchange of stocks, bonds, and other capital assets where the profit is in excess of $250,000 annually to fund K-12 education, early learning, and child care, and advance our paramount duty to amply provide an education to every child in the state, to pay for vital services, invest in education and more.”

Republicans call it an illegal income tax, pointing to a landmark 1936 case in which the state Supreme Court ruled the state constitution required all property to be taxed at the same rate. The court said income counted as property, striking down a graduated income tax rate earlier approved by voters.

Since then, voters have rejected an income tax a half dozen times at the ballot box.

Supporters say this is an effort to balance Washington’s tax system, often described as the most regressive in the nation.

“The poorest families in Washington are asked to pay 17 to 18 cents of every dollar they earn to taxes to state and local government, families like mine in the middle class pay nine to 10 cents of our income to state and local taxes,” explained Democratic Senator Marko Liias.

“The wealthiest few in our state, those who have benefited from the dramatic growth of the stock market last year, pay one to two cents of their income to state and local taxes. That is fundamentally unfair, it is fundamentally unfair to the middle class families that are struggling in this difficult time. And it is even worse for those that are at the margins of our society trying to claw their ways into opportunity,” Liias added, explaining this bill takes modest steps to right that unfairness.

Critics say it’s an effort to create a path to an income tax that will impact all Washingtonians.

“If you think that this tax, if it passes and is put in the law will stay at the level that it’s at, you’re very naive because every time we need a dime, they’re going to drop that level. And more and more, pretty soon, we’re just going to have an income tax across to every citizen in the state of Washington,” Republican Senator Curtis King said.

“We’re passing this bill today because we believe that our most liberal Supreme Court will find a word, will find two words, will find three words that they can say, oh, oh, look at what all these people in the past have missed. This really is an income tax. That’s what they’re (Democrats) counting on. I can’t believe it,” King added.

One of the key points of contention comes from the effort of supporters to block a referendum, which would allow a public vote in 2021 to reverse the tax.

The original version of the bill included an emergency clause that not only sees the bill take effect immediately, but would have blocked a referendum. It was taken out after an amendment from Democratic Senator Steve Hobbs.

Language was later added to the bill saying it “is necessary for the support of the state government and its existing public institutions,” which Democratic Senator Jamie Pedersen acknowledged would block a referendum.

“There’s a separate clause in the state constitution in the referendum power that says that when the Legislature determines that a tax is necessary for the support of state government and its existing institutions, that is not subject to referendum, that doesn’t mean that the voters can’t weigh in, the voters’ initiative power is always there,” Pedersen explained.

“But it means that the framers of the referendum and initiative power understood that people generally don’t like to pay taxes, and that if the Legislature determined that a tax was necessary, there was going to be a different mechanism, initiative and not referendum, to test that. Because we didn’t want to freeze an entire budget for 10 months or eight months while the voters weighed in and the election was certified,” Pedersen added.

That explanation was not received well by Republicans who complained about what they call a stealth prohibition on a referendum.

“They only want an initiative, but not a referendum. We made it clear we wanted a referendum when this passed out of the Senate, but what folks don’t realize that with a referendum, voters can act this year. With an initiative, it can’t be until 2022, which will allow for a court case and hopefully change the precedent that will allow a full scale personal income tax on all of Washingtonians,” Republican Senator John Braun explained.

The House approved the bill Saturday on a 52-46 vote. The Senate approved the bill 25-24. Governor Inslee is expected to sign the bill.

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