“Trojan Horse” cap gains proposal likely in 2021

“Trojan Horse” cap gains proposal likely in 2021

Despite Sen. Mark Mullet (D-5) narrowly holding onto his legislative seat this November, proponents of a capital gains income tax say they still intend to file a bill in the upcoming 2021 legislative session. Capitol observers have previously noted that defeating Mullet would have made such a proposal’s passage all but certain.

If passed, the bill is expected to trigger a legal challenge that some tax reform advocates hope results in a State Supreme Court decision addressing the issue of whether income is property – a position that would have important implications for other future progressive revenue proposals.

Rep. Noel Frame (D-36) is a co-chair of the state Tax Structure Work Group, which is set to deliver a report to the legislature at the end of the month on possible changes to the state tax code. The newly appointed chair of the House Finance Committee, Frame has supported legislation in prior sessions to enact a capital gains tax, though she told Lens who introduces the bill this year and in what chamber “is to be determined.”

Advocates of a capital gains income tax argue that the state tax code is too regressive, as it relies heavily on the sales tax for 60 percent of state revenue. They contend that it should be reduced or replaced with more progressive revenues streams – which would then place more of the tax burden on higher-income earners.

According to a Dec. 4 presentation to the work group by the state Department of Revenue, Washington’s overall tax burden is 8.32 percent, ranking it at 29th among the 50 states. In comparison, the overall tax burden in Oregon is 8.34 percent, while in New York it is 12.28 percent. Although there is a federal capital gains income tax of up to 20 percent, Washington is one of several states that does not have its own capital gains income tax.

Frame said any bill introduced this year would likely be limited in scope due to the anticipated lawsuit and would not address existing taxes. “It’s hard to do that before you know what the outcome’s going to be. My personal hope is it will pass the legal challenges.”

And while the outcome of the November election hasn’t resulted in a significant shift in either state chamber, Frame says she is “more optimistic” the bill can clear the legislature. “We’re dealing with a budget gap and a strong desire for there to be economic stimulus and recovery efforts. Those calls are bipartisan. That money’s going to come from somewhere.”

Sen. Lynda Wilson (R-17) is the newly appointed ranking member of the Senate Ways and Means Committee. She told Lens that there’s a good chance the bill could get out of the committee, but she is more skeptical about its chances on the Senate floor. She further noted that Mullet likely “will push back in his own caucus – and maybe a few others (will).”

Work Group Co-Chair Keith Wagoner (R-39) told TVW’s Austin Jenkins during a Dec. 10 interview that while he doesn’t support a capital gains income tax, if the proposal included a large reduction in the state property tax “and…that there wasn’t going to be some changes the next legislative session, that would be a great place to start.”

However, Wilson said “We don’t need any of these taxes, and that will be our argument (during session).”

Also opposing the idea of a tax on both policy and legality grounds is Washington Policy Center (WPC) Government Reform Director Jason Mercier. At a Dec. 8 WPC webinar he said lawmakers “propose taxes no matter the revenue. In their mind, there’s no time not to raise taxes.” He’s also noted the recent decision by Tesla CEO Elon Musk to move from California to Texas because it has no income tax.

From the legal side, Mercier has previously reported that every state with a capital gains tax considers it a part of their income tax, and the Internal Revenue Services (IRS) also considers a capital gains tax to be an income tax. He said at the webinar that outside of Washington state’s tax discussions “with no exception, no controversy: capital gains are income.”

Emails from some state lawmakers obtained by Mercier also reveal that they view a capital gains tax as a step toward enacting a progressive income tax. While a flat-rate income tax is legal, the state high court has repeatedly ruled since the 1930s that income is considered property and is subject to the state constitution’s uniformity clause. That provision requires property to be taxed at the same rate within their respective classes, such as real estate, stocks, and bonds.

“The only reason a capital gains tax is being proposed is to go directly to the Supreme Court,” Mercier said. “This is their trojan horse. They know the minute it’s passed they’re sued. The voters aren’t cooperating. That’s what this is.”

The legislative session begins January 11.

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