Part of the debate over Governor Jay Inslee’s proposed nine percent capital gains income tax, as with other prior proposals, is whether it is in fact an income tax and therefore subject to state constitutional provisions regarding property.
While state officials and some state lawmakers have sought to portray SB 5096 sponsored by Sen. June Robinson (D-38) as an excise tax on the sale of capital gains, those testifying at a Jan. 14 public hearing in the Senate Ways and Means Committee noted numerous discrepancies between rhetoric and actual policy.
Another challenge for Inslee and other advocates of the tax has been reconciling their support with how state agencies have promoted Washington’s business climate. Until just recently, the state Department of Commerce touted the lack of a personal or corporate income tax on its Choose Washington website. According to emails obtained by Lens, that information in part was removed and edited by Commerce this month and “is consistent with updates we’ve made to other materials over the past several months.” Yet in 2018 a Commerce official said the lack of a capital gains income tax was a “selling point” when trying to attract businesses to the state.
However, Inslee and others are now pivoting to touting the tax as a way to improve the state’s tax structure and provide new revenue to help cover $5 billion in increased spending for his 2021-23 operating budget. The tax is estimated to generate $1.1 billion in the 2021-23 biennium and $2.6 billion in the 2023-25 biennium.
Although Office of Financial Management (OFM) Director David Schumacher told the House Appropriations Committee during a Jan. 14 public hearing that the proposal was an excise tax and would “pass muster” legally, opponents cite numerous examples of how it is indistinguishable from an income tax. Ways and Means Committee staff member Jeff Mitchell told legislators that a capital gains tax is a tax on “the profit realized on the sale of noninventory assets.”
SB 5096’s fiscal note states that the “taxable amount is an individual’s Washington capital gains,” and a Q&A page on OFM’s website states that “the proposal applies (only) to long-term capital gains income,” noting that “earned income from salaries and wages are not capital gains and will not be taxed at all under this proposal.”
“As the bill report and text of the bill makes clear, this is a tax on income,” Washington Policy Center Government Reform Director Jason Mercier told Ways and Means. “This is not a surprise. Income taxes are on income.”
Mercier has previously documented that all state departments of revenue consider their capital gains taxes to be income taxes; there are also no states with a stand-alone capital gains income tax. The Internal Revenue Service has also said a capital gains tax is an income tax.
State Tax Policy Director Jared Walczak with the Tax Foundation also argued during the Jan. 14 public hearing that it’s an income tax because “it is structured not on the transaction itself but on a net measurement. Courts usually look to substance, not form.”
Even some SB 5096 proponents such as Budget and Policy Center Senior Fellow Andy Nicholas indicated that is the case, saying at the public hearing that “taxing profits from their (capital gains) sale” would allow the state to invest new revenue in education, health care, and childcare.
Aside from the semantics debate, Mercier said Commerce “had it right the first time” in highlighting Washington’s lack of income taxes, adding that states such as California have found them to be extremely volatile and unpredictable. It’s an observation also made in past years by the state Department of Revenue. OFM’s Q&A page says: “the state can manage these fluctuations through careful budgeting.”
While advocates like Nicholas argued the tax would make the tax code more progressive and address economic inequities in the state, others insisted the tax would harm Washington’s business climate and even undermine housing efforts.
Former Bellevue city councilmember Kevin Wallace runs Wallace Properties, a Bellevue-based commercial real estate company and serves on the Board of Trustees for the Bellevue Chamber of Commerce. He told Ways and Means that a capital gains income tax would only raise costs for housing projects – at a time when the legislature has already increased the state real estate excise tax (REET) and the ongoing eviction moratorium has deprived landlords of rent revenue.
“This cost increase has to be factored into our financial analysis,” he said. “(It) makes it even more difficult to produce transit-orientated affordable housing, and at the worst possible time.”
Though the tax sets a threshold for single ($25,000) and dual ($50,000) tax returns while creating various exemptions, Washington Retail Association Policy and Government Affairs Senior Vice President Mark Johnson told the committee that it would still affect its members, 90 percent of which are small businesses. He added that the tax would be on top of existing taxes they already pay, including the business and occupation (B&O) tax, unemployment insurance tax, and workers compensation.
“Their business is their retirement plan,” he said, adding that the legislature should “either reject this legislation or significantly alter it.”
Steve Miller owns American Distributing Co., a Marysville-based propane gas business that employs 16 people. He told the committee “I don’t think we should be penalized,” noting that his business recently helped provide propane to stores in parts of Western Washington affected by a power outage.
“Businesses like mine…are the ones (the community) come to when the times are good, also when the times are bad.”
There is no further action scheduled for SB 5096.