The same week a 2014 legal memo to the Seattle City council regarding a proposed “millionaire’s tax” was released, the House Finance Committee voted on April 19 to advance a bill creating a capital gains income tax to pay for education. HB 2156 would impose a 9.9 percent tax on the income derived from long-term capital gains and direct the revenue stream to the Education Legacy Trust account. The bill would also restructure the real estate excise tax (REET) from its current 1.28 flat rate to a graduated rate.
For some capital gains tax critics, the proposal is viewed as an effort to overturn the state constitution’s prohibition on a progressive income tax. Although the bill refers to it as an excise tax, the tax’s actual definition of capital gains is “the net long-term capital gain reportable for federal income tax purposes. If enacted, the bill would also face a far less perilous legal battle than Seattle’s ordinance, which was struck down on statutory grounds for violating a 1984 state law prohibiting local governments from imposing income taxes. If HB 2156 is approved by the legislature and challenged in court, its legality would directly address the question of whether income is property and thus subject to the state constitution’s uniformity clause regarding property taxes.
Further cementing the belief by some tax analysts that the bill is meant to trigger a lawsuit was the rejection by the committee of a proposed amendment to HB 2156 that would have prohibited the state attorney general from asking the State Supreme Court to consider the constitutional issue regarding income as property.
Sponsor Rep. Brandon Vick (R-18) told colleagues that it’s “a straight-face test amendment: this bill is what the legislature says it is, and you have to defend it is such.”
However, the proposal was opposed by Rep. Larry Springer (D-45), who argued it “sets a very dangerous precedent that the legislative body ignores the separation of powers and begins to direct the administrative statewide elected official to do something. (I’m) not sure that’s where we want to go. The attorney general will make whatever decisions he makes, and the voters will decide whether that was appropriate or not.”
Yet, Rep. Drew Stokesbary (R-31) said “this is quite literally how our constitutional system of government works: legislature instructs the executive branch agencies what to do and what not to do. The executive branch is only permitted under both the federal Constitution and more importantly here in Washington state to act in accordance with the Constitution and with the statutes that this legislature passed.”
Chair Gael Tarleton (D-36) also spoke against the amendment. “I don’t want to predict what would happen, and I also don’t want to assume that we know what the outcome … might be right now. I just want to ensure that we are not undermining the authority of this legislature to develop policy regarding the taxes of our state.”
In response to the rejected amendment, Washington Policy Center Government Reform Director Jason Mercier wrote that “by refusing to adopt this amendment, it is clear supporters of the income tax on capital gains are trying to set up a lawsuit in hopes judges will do what voters won’t and overturn nearly a century of caselaw prohibiting a graduated income tax.”
Prior to the bill’s passage, Stokesbary cited other problems he and other opponents see in the bill, including the volatility of a capital gains tax as well as the effect of a REET restructure on housing. “(By) imposing a real estate excise tax or higher real estate excise tax on multifamily housing developers, we’re going to make housing more expensive. It’s that simple. Not only is it not necessary, it’s simply bad tax policy.”
HB 2156 has been referred to the Rules Committee for review.