Business owners concerned over income tax proposal

Business owners concerned over income tax proposal
HB 2186 would restructure the state real estate excise tax and impose a capital gains income tax. An April 4 public hearing of the House Finance Committee reiterated both opposition to and support for both proposals.

The latest effort this legislative session to enact a capital gains income tax via HB 2156 as part of the House 2019-21 operating budget received both criticism and praise during a April 4 public hearing of the House Finance Committee. The legislation would restructure the state real estate excise tax (REET) from a flat rate to a graduated rate, a proposal that also garnered warnings similar to those issued regarding previous bills this session.

Sponsored by Rep. Laurie Jinkins (D-27), HB 2156 would impose a 9.9 percent income tax on long-term capital gains of more than $100,000 for individuals or $200,000 if jointly filed. The bill includes numerous exemptions, including residential units, retirement assets, livestock, certain types of agricultural lands and timberland.

The legislation would swap the 1.28 percent REET rate with a graduated rate ranging from .9 percent for properties worth $500,000 or less, to three percent for properties $3 million or more. However, the 1.28 percent rate would remain for certain types of lands including agricultural, timberlands and undeveloped lands. There would also be a deduction for “qualified” family-owned small businesses.

The capital gains revenue would be deposited into the education legacy trust account used to fund K-12 and higher education.

During the April 4 public hearing, Jinkins argued that the proposal would update the state’s tax structure to reflect that of its modern economy. That viewpoint was shared by HB 2186 cosponsor and Chair Gael Tarleton (D-36).

“We have a tax code that was built in 1935,” Tarleton said.

However, repeated claims of “tax loopholes” by some testifiers during the public hearing drew a response from Rep. Larry Springer (D-45). “Our tax code is filled with exemptions, preferential rates, and they are there for a reason. They were there because the legislature put them there. They are not loopholes; loopholes imply that somebody is getting away with something they shouldn’t. Anybody taking advantage of a preferential rate or an exemption is doing so because we, the legislature, said they could.”

Ongoing apprehension regarding both taxes in HB 2186 were raised by business members. Aside from the legality of the capital gains tax, Jan Gee with the Washington Food Industry Association said that with a low profit margin, the “B&O tax has a very significant impact on our industry. Adding another tax on top of that for our grocers, we are very concerned about.” She added that an exemption intended for retirement capital gains “misses the retirement for most of our grocers, because their retirement is in their investment in their business.”

Biggs Insurance CEO Greg Seifert with the Professional Insurance Association told committee members that a capital gains tax on the sale of a business “would be pretty significant, because that’s where we’ve put our money over the years as opposed to putting it in retirement plans.”

In agreement with Seifert was insurance agency owner Barb Kaiser. “I’m getting ready to retire, and this bill would impact my retirement fund, because that’s what it is. Either I’m going to sell early to avoid the tax, take a hit or wait and not retire for quite a few years.”

She added that the tax could also deter people from starting their own businesses in the state if they know they have to pay a new 9.9 percent tax on the gains.

Industry members had similar concerns about the REET tax restructuring. Greg Hanon with the Commercial Real Estate Development Association told committee members that while the tax will only affect roughly two percent of property sales, they would have a “disproportionate impact” on projected revenues. According to Hanon, in King County just 100 sales compose 23 percent of REET revenue within the county.

“We believe such a proposal will result in less revenue than anticipated,” he said, adding that “it will only take a fraction to be delayed or deferred” for that to occur.

A-P Hurd is the founder of Skipstone, an urban real estate strategy and planning consultancy. She told the committee that although a three percent REET tax doesn’t seem large, it “can make the difference between selling or sitting back.”

PMF Investments President Brian Franklin told legislators at the hearing that the tax could cause lead to them “limiting sales or putting off sales entirely,” adding that several ongoing developments in the Puget Sound region might not have occurred had the new tax rate been in place.

HB 2186 is scheduled for execution action April 5.

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