Governor Jay Inslee on May 4 signed SB 5096, which imposes a seven percent tax on the income from long-term capital gains above $250,000 starting next year. However, it remains to be seen whether the tax will still exist next year – which will depend on how courts interpret several aspects of the bill.
““This is a day where Washington state starts to make progress on making our upside-down tax system fairer and more equitable,” Inslee said at the signing ceremony.
However, Opportunity for All Coalition (OFAC) President Collin Hathaway in a statement called it “an unconstitutional and illegal income tax that we believe will be struck down in court. This action will hurt job creation and put our state at a competitive disadvantage. We are confident the courts will uphold the constitution and ensure this tax is never implemented.”
The first lawsuit against the tax was already filed last week by the Freedom Foundation, while OFAC has also signaled its intent to file a separate lawsuit. The two groups were involved in a successful legal challenge to the city of Seattle’s 2017 graduated income tax ordinance.
A provision in the bill constituting an emergency clause prohibits a voter referendum – though the majority party denied it was during floor debates over bill amendments regarding the bill language in question. The clause states the tax “is necessary for the support of the state government and its existing public institutions,” yet is not found where emergency clauses are typically located in bills. Emergency clauses also state that the bill takes effect immediately, while SB 5096 doesn’t take effect 2022.
As a result, voters will have to wait until next year for an initiative to repeal the law. However, by then proponents of the tax may have already achieved a more important victory – the State Supreme Court overturning eight decades of rulings declaring income to be property under the state Constitution’s definition. In Washington, property must be taxed uniformly according to its class, which prohibits a progressive income tax.
For advocates, the tax would shift the burden toward higher-income individuals. House Finance Committee Chair Noel Frame (D-36) said at the May 4 ceremony that the bill “represents two gigantic steps forward to ensure Washington state has an economy and a tax code that works for everyone. We had built a tax code where working families are hit the hardest…while the wealthiest pay the least. Today marks the beginning of the end of that inequity.”
However, SB 5096 revenue doesn’t lower any existing state taxes such as the sales tax or property tax, and instead is dedicated to new basic education programs. Detractors noted that it is one of the most volatile taxes and caused states like California to separate it entirely from their budgeting process.
Some proponents of the tax have for several years advocated that legislation be passed to trigger a lawsuit allowing the state high court to take up the constitutional question. One of the earliest efforts was attempted in the city of Olympia via Measure 1. Local voters rejected it, and the State Court of Appeals struck it down in its ruling. The city of Seattle’s 2017 ordinance was struck down in King County Superior Court and then in the Court of Appeals; the State Supreme Court refused to take up the case. Prior legislative sessions involved capital gain income taxes included in proposed budgets but those were removed before passage.
Those subject to the capital gains income tax must file their first return in 2023.