Despite 10 percent revenue growth, Gov. Jay Inslee and some lawmakers want to impose even more taxes when adopting the 2019-21 state budget. While this continued push to raise taxes despite record revenues is confusing, more distressing is the apparent inability by some to have an honest discussion about one of the new taxes some lawmakers are proposing — an income tax on capital gains.
Consider HB 2156, proposed as part of the House’s budget. This bill would impose a 9.9 percent income tax on capital gains above the revenue threshold of $100,000 for individuals and $200,000 for those filing joint federal income-tax returns.
Lawmakers are smart people working to adopt fact-based policy, yet some continue to say they want to close the so-called “loophole” on capital gains via an “excise tax.” If you don’t know what an “excise tax” on capital gains is, you are not alone. Such a tax does not exist anywhere in the country. So, what is this “loophole” they speak of?
I searched and searched the state tax code trying to find that “loophole,” and I found nothing. I was, however, able to find 10 straight rejections of income tax ballot measures by the people (including 6 proposed constitutional amendments) and state supreme court rulings prohibiting a graduated income tax. In fact, one short unanimous ruling from 1960 told lawmakers they needed to amend the state constitution if they wanted to impose an income tax.
I contacted the revenue departments for all 50 states and was told the same thing — those states that tax capital gains do so with their income-tax codes and those states without income taxes do not tax capital gains because such earnings are income.
For example, Florida officials told me: “There is currently no Florida income tax for individuals and, therefore, no Florida capital gains tax for individuals.”
Not impressed with state responses? Here is what the IRS says about a capital-gains tax: “You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”
Washington’s nonpartisan legislative staff appears to agree based on the staff report for one of the state capital gains tax proposals (SB 5129) saying: “In addition to the federal tax, capital gains are often subject to state income taxes. Most states do not have separate capital gains tax rates. Instead, most states tax capital gains as ordinary income subject to the state’s income tax rates.”
In fact, the actual text of HB 2156 makes it crystal clear the taxable capital gain is the revenue reported “for federal income tax purposes” and that individuals subject to the tax would be required to submit to the state a copy of their federal income tax return.
Notwithstanding the fact a capital-gains tax is an income tax, imposing one would be bad policy for our state. Consider the advice of former California Gov. Jerry Brown, who warned of the problems of relying on highly volatile capital-gains taxes. Brown persuaded voters to pass a 2014 constitutional amendment to restrict the use of capital gains tax revenue that, according to the California Legislative Analyst Office “separates state spending from the roller coaster of revenue volatility.”
Washington’s own Department of Revenue also warned our lawmakers about the extreme instability of capital gains back in 2012 saying: “Capital gains are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented here.”
If enacted, Washington would be the only state in the country with a stand-alone income tax on capital gains. Doing this would hurt the state’s competitiveness.
Washington’s Department of Commerce runs a website called Choose Washington that boasts: “We offer businesses some competitive advantages found in few other states. This includes no personal or corporate income tax.”
If an income tax is imposed, Commerce warned that would mean “one less tool that we have in our economic development toolbox.”
Lawmakers can’t claim ignorance of these facts. I reported all of these details to the House Finance Committee during a Jan. 24 work session on the state’s tax structure. I also provided every lawmaker with a copy of the IRS statement that defines a tax on capital gains as an income tax.
Despite these facts, supporters of a capital-gains tax refuse to call their proposal an income tax. This head-in-the-sand approach will result in an immediate lawsuit to invalidate the tax if it is imposed without first amending the state constitution.
The only place an “excise tax” on capital gains exists is in the minds of those trying to circumvent the state constitution and voters’ consistent opposition to imposing income taxes.
Washingtonians deserve an honest tax debate. It is time to call a capital-gains tax what it is — an income tax.