Senate bill would change state tax structure

Senate bill would change state tax structure
SB 5961 would restructure parts of Washington’s tax code by offering tax relief with the business and occupation tax and low-income tax credit, but also including a capital gains income tax. Photo: freepik.com

Despite a nearly $4.46 billion revenue increase from the 2017-19 biennium, some state lawmakers have introduced proposals to restructure Washington’s tax system. Among them is SB 5961 sponsored by Majority Deputy Leader Rebecca Saldaña (D-37) which would impose several new taxes, including a capital gains income tax, while increasing a business and occupation (B&O) tax credit as well as funding a low-income tax exemption program.

Although much of the testimony at an April. 8 public hearing of the Senate Ways and Means Committee echoed previous statements concerning similar bills with capital gains tax proposals, Association of Washington Business Director of Government Affairs Clay Hill said that SB 5961 is nevertheless “substantially different from anything we’ve seen in the House.”

Under SB 5961, the following changes would be made to the tax code:

  • An 8.9 percent long-term capital gains tax, beginning in 2020;
  • Implementation of the Working Families Tax Exemption created by the legislature in 2008;
  • Increasing the B&O small business tax credit to $200,000 for businesses with a taxable income below $2.5 million;
  • Lowering the property tax exemption threshold for senior citizens, the disabled and veterans; and
  • Creating a research committee to study other ways to “modernize and rebalance” the state’s tax structure.

The bill would exempt a variety of capital gains from the income tax, including the first $250,000. Other exemptions include residential units, timberlands and retirement savings.

The research committee would be composed of nine members consisting of two Republican and Democrat lawmakers, respectively, one governor appointee and representatives from several entities such as the Association of Washington Cities and Washington State Association of Counties. The committee’s report would be due to the legislature in 2023.

During the public hearing, Saldaña said that even if the whole bill doesn’t clear the legislature “I do think it is a meaningful step.”

While Majority Leader Andy Billig (D-3) stated at the public hearing there is “generally recognition that there’s a problem with our tax code,” there’s debate as to precisely what’s wrong with it. While some point to the state’s reliance on a sales tax and the lack of a progressive income tax, others argue the B&O tax – created as an emergency revenue source in the 1930s – harms low-margin businesses. While there’s disagreement over how “fair” the tax structure may be, a Tax Foundation study concluded that Washington’s current tax code provides a relatively stable revenue stream. According to a survey by the National Association of State Budget Officers, 33 out of 50 states in the nation struggle with less-than-projected revenue, though Washington is not among them.

Despite the exemptions provided in the capital gains income tax, Mark Johnson with the Washington Retail Association warned committee members at the public hearing that “we still believe it will impact a significant number of retailers in Washington” whose businesses are their primary retirement fund.

Though he had praise for the tax relief provided in the bill, Hill added that the capital gains income tax lacks a corresponding Senate joint resolution. He added the voters “should certainly have a say, given the number of times they’ve said ‘no’ to an income tax.”

If enacted, the bill is certain to face legal challenges for violating the state constitution’s one percent property tax cap, because income is considered property.

Though some lawmakers and elected officials have tried to portray various capital gains tax proposals as an excise tax for the “privilege” of selling capital gains, various supporting documents for SB 5961’s capital gains tax leave little doubt that it would be imposed on income and not the transaction as with the state’s real estate excise tax. The bill report compiled by nonpartisan committee staff states that “under the federal tax code, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income.”

The bill’s fiscal note also notes that a state resident’s capital gains tax return is due the same time as the federal income tax return. A resident who receives an extension for the federal income tax return would also qualify for a state extension on the capital gains tax returns.

No further action has been scheduled for SB 5961.

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