Capital gains income tax proposals loom next session

Capital gains income tax proposals loom next session
A Sept. 13 work session of the House Finance Committee indicates that capital gains income tax proposals are likely for the 2020 legislative session. Photo: freepik.com

This year’s legislative session saw several unsuccessful proposals to enact a capital gains income tax. Comments made by lawmakers at a Sept. 13 House Finance Committee work session on tax policy strongly suggest another round of proposals is in store for the 2020 session.

Of interest to legislators who might introduce a bill is whether or not to delink any proposed state-level capital gains tax from the federal opportunity zones (FOZ) which exist in 36 of the Washington’s 39 counties. Under FOZ, people investing in property or projects within those zones can pay a reduced tax on capital gains.

At the Sept. 13 work session, Chairman Gael Tarleton (D-36) said: “I’m sure that there will be some pieces of legislation around the opportunity zones this year. I am very certain that there are people exploring this, so understanding the implications for the state’s revenue is really key.”

State Department of Revenue (DOR) officials explained that the state has several options; it could create a tax that incorporates the FOZ, impose a tax that delinks the federal program or includes its own tax preference connected to the FOZ – or, avoid a capital gains tax altogether.

The financial effect of including the FOZ in a state capital gains income tax would be a delay of revenue collection from the gains until they are recognized at the federal level.

If another proposal is introduced in the next session, almost certain to be part of the discussion is whether it is an excise tax rather than a tax on the income earned, perhaps in order to avoid constitutional issues regarding property taxes. However, Washington Policy Center Government Reform Director Jason Mercier has previously reported that every single state with a capital gains tax classifies it as part of its individual income tax.

The Internal Revenue Service (IRS) has also stated the federal gains tax is indeed a tax on income.

DOR Tax Policy Specialist Jack Brumbaugh told lawmakers at the work session that a state capital gains tax that incorporates FOZ would be “based on the federal net long term gains capital amount.” Although the DOR presentation referred to the capital gains tax as an excise tax (slide 17), it also included a slide showing whether the gains are considered “taxable income” (slide 4). Excise taxes are imposed on a transaction or sale; the state real estate excise tax (REET) applies to property sales and is applied to the whole sales price, whereas one of the capital gains taxes proposed this year applied to the “adjusted capital gain” from a sale or transaction.

At a WPC Solutions Summit earlier this year, Republican State Treasurer Duane Davidson said “I’m a CPA (certified public accountant). Capital gains is an income tax.”

Aside from the constitutionality debate, another issue for lawmakers to consider is whether a capital gains income would be good for the state’s economy. The state Department of Commerce has previously described the lack of state capital gains tax as a “selling point” for prospective business interested in moving to Washington. The department’s Choose Washington website states that “we offer businesses some competitive advantages found in few other states. This includes no personal or corporate income tax.”

At the Sept. 13 work session, Commerce Assistant Director of Economic Development & Competitiveness Chris Green told committee members that “if you look at investment into the state and you look at business growth…there’s been some success,” though he added “I think there’s a lot of things that we…want to try to figure out how to do better on. We think a lot about some of the communities that still are at double-digit unemployment. How do you drive investment there?”

Rep. Drew Stokesbary (R-31) asked Green “with those concerns in mind, do you think it’s a state income tax? Will it make those problems harder or easier to solve?”

Green replied “I don’t see how that would impact our ability right now. With the tax structure the way it is, I think we’ve actually had a lot of success in bringing new projects and capital to the state.”

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