New capital gains income tax proposed

New capital gains income tax proposed
House Finance Committee Chair Kristine Lytton (D-40) has introduced HB 2967, which would create a statewide capital gains tax to offset property tax exemptions for certain state residents. Although the bill refers to it as an “excise tax” akin to the state’s real estate excise tax (REET), tax experts for and against a progressive income tax say a capital gains tax is in fact a tax on income. Photo: freestockphotos.biz

A Democrat House lawmaker has introduced a bill establishing a statewide capital gains income tax while reducing the state property tax burden on certain state residents. The proposal comes after Governor Jay Inslee left it out of his proposed 2018 supplemental budget and Senate leaders indicated early in session that no major tax overhaul is planned this year.

During a January 23 press conference, Senate Majority Leader Sharon Nelson (D-34) called the state’s tax scheme “regressive,” but added “it’s not something we will get done in 60 days. We’re going to be forming a task force in the Senate, and hopefully we’ll be working with our counterparts in the House to start that effort.”

HB 2967 is sponsored by Finance Committee Chair Kristine Lytton (D-40), who last year made a similar proposal to help pay for new state spending as part of the McCleary mandate. That bill passed out of Finance but got held up in Rules.

HB 2967 would impose a seven percent tax on adjusted capital gains. Although the bill calls it an “excise tax” “for the privilege of selling or exchanging long-term capital assets, or receiving Washington capital gains,” the departments of revenue for every state with a capital gains tax classify it as an income tax. Also, every state with a capital gains tax also has an income tax.

The bill itself seems to tacitly acknowledge this fact; Section 109, subsection 2 requires that Washingtonians who owe state capital gains tax must also file those gains with a federal income tax return.

This all but guarantees a legal challenge if the legislature votes in favor of it. That’s according to Jason Mercier, government reform director at the Washington Policy Center. While much attention has been given to the Seattle income tax lawsuit, enacted in part to trigger a legal challenge to the state’s prohibition on a progressive income tax, Mercier has repeatedly warned that a statewide capital gains tax is a much greater threat.

“My biggest fear has always been a capital gains,” he said. “If the legislature passed the capital gains or it passes on the ballot, it would get directly to the constitutional fight” as to whether income is considered property and thus subject to the Constitution’s uniformity tax provision. “It’s still illegal; you’re not having an excise tax on the transaction, you’re taxing the income reported to the IRS.”

It was a point also raised last year by Tax Foundation Senior Policy Analyst Jared Walczak. Commenting on last year’s capital gains tax proposal, which its backers also called an “excise tax,” Walczak wrote on Twitter that “the idea is that it’s an excise tax on the sale of capital asset, not an income tax on proceeds. But that’s not how excise taxes work. If a capital gains tax was an excise tax, we would expect it to fall on the entire sales price (or flat per sale), not just net gain.”

Incidentally, also in agreement is Economic Opportunity Institute Executive Director John Burbank who helped the city of Seattle with its local income tax proposal. In an email sent out in April and made available through a public records request by WPC, Burbank wrote that “the tax on capital gains is being portrayed (wrongly, I think) as NOT a tax on income, but as an excise tax.”

Washington State House of Representatives Senior Counsel Tracey O’Brien last year concluded it was possible the Supreme Court might rule a capital gains tax is an excise tax similar to the state’s real estate excise tax (REET). However, Mercier argues that an excise tax applies to the transaction regardless of whether the sale is at a loss or profit.

Section 103 subsection 2 of HB 2967 states that “if an individual’s Washington capital  gains are less than zero for a taxable year, no tax is due under this section.”

Legalities aside, the move has already drawn opposition from Senate Republicans also calling it an income tax, and it is unlikely to gain support from fiscally conservative Senate Democrats who favored a constitutional amendment prohibiting any income tax. Entrepreneurs and venture capitalists have also warned they already pay an effective top rate of 25 percent in federal capital gains taxes.

HB 2967 has been referred to Finance, but no public hearing has been scheduled.

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