Inslee signs off on capital gains tax for wealthy and tax rebate for lower-income workers in Washington

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1 of 3 Washington Gov. Jay Inslee, center, reacts after signing a bill into law in Tukwila on Tuesday that levies a new capital gains tax. (Ted S. Warren / The Associated Press)
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2 of 3 This is the bill that launches the new capital gains tax. (Ted S. Warren / The Associated Press)
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3 of 3 Gov. Jay Inslee signs the capital gains tax bill into law on Tuesday in Tukwila. He also signed off on an annual tax rebate to hundreds of thousands of lower-income workers. (Ted S. Warren / The Associated Press)

With two strokes of his pen on Tuesday, Gov. Jay Inslee enacted a new capital gains tax on some wealthier Washingtonians and handed an annual tax rebate to hundreds of thousands of lower-income workers.

During a bill-signing ceremony at the Tukwila Community Center, Inslee hailed the measures passed by the Legislature as a first step toward tax fairness in the state.

“We refuse to live [in] and accept a society of massive poverty amongst massive wealth,” Inslee said as he signed the bills amid applause from a few dozen invited supporters, many of whom had pushed for the policies for more than a decade.

The capital gains tax and the “Working Families” tax rebate had been longstanding goals for progressive groups, but failed for years to make it through the Legislature. This year, Inslee and Democrats wielded solid majorities to break through opposition, adopting the tax shifts along with major climate bills and police reforms.

“Today is a victory for collective hope, for lifting people up for fixing the upside-down tax code,” said Rep. My-Linh Thai, D-Newcastle, chief sponsor of the working families measure, which will send annual payments of between $300 and $1,200 to an estimated 420,000 Washingtonians starting in 2023.

The 7% tax on capital gains, which passed narrowly amid staunch opposition from Republicans and business groups, would apply to profits above $250,000 on sales of investments such as stocks and bonds.

It exempts real estate and retirement accounts, as well as timber and livestock sales, and provides deductions for many smaller, family-owned businesses.

The tax would apply to about 7,000 Washingtonians a year and would raise about $445 million starting in fiscal year 2023, according to estimates by the state Department of Revenue. The money raised will be deposited into the state’s Education Legacy Trust Fund, where it can pay for early learning and child care programs.

Opponents argued the tax is too volatile to rely on, and unnecessary given the state’s rebounding tax revenues. Some already have sued to halt it from going into effect next year.

The Freedom Foundation, a conservative Olympia-based nonprofit, filed a lawsuit last week in Douglas County on behalf of several taxpayers, contending the new tax amounts to an illegal income tax under decades-old state Supreme Court decisions.

Another group, calling itself the Opportunity for All Coalition, has also announced plans to sue.

“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,” said Collin Hathaway, the coalition’s president, in a statement.

In crafting the bill, lawmakers called the levy an excise tax on profits from the sale of investments — not an income tax. Inslee and other supporters repeated that language on Tuesday.

But opponents have pointed out that all other states with a capital gains tax treat it as an income tax. That dispute will likely be eventually settled by the state Supreme Court.

In a short interview after the signing, Inslee said he is confident the capital gains tax will pass legal muster “because it’s based on justice and fairness.”

Some backers of the new tax have said they hope the lawsuits against it will lead the Supreme Court to revisit decisions dating back to the 1930s that have invalidated a progressive state income tax by ruling that income is property, which must be taxed at a uniform rate under the state constitution.

“From my perspective, the most important thing about the capital gains tax is the ability to use the inevitable challenge to it as a vehicle for the state Supreme Court to reconsider what I think are bad outdated rulings,” said state Sen. Jamie Pedersen, D-Seattle, in an interview last week.

Inslee, who has publicly opposed a state income tax, declined to say Tuesday whether he hoped the court might open the door to one. “I’ll leave that up to the state Supreme Court. That’s a decision for them,” he said.

The capital gains tax law also creates a new filing requirement for taxpayers, though it says people with no liability don’t have to file paperwork. Mikhail Carpenter, a Department of Revenue spokesperson, said the agency is working through how to implement the new requirement.

The tax rebate signed by Inslee was far less controversial, passing with large bipartisan majorities in the Legislature.

The program, modeled after the federal Earned Income Tax Credit, is expected to pay out about $250 million a year beginning in 2023.

The exemption, aimed at making up for the state’s regressive, sales-tax-dependent system, was approved by the Legislature in 2008 but never funded until this year.

Eligibility for the rebates will mirror the federal earned-income credit, and will depend on income and family size. For tax year 2021, a married couple with three children could earn up to $57,414 and qualify. The rebate decreases for people with incomes close to the maximum allowed, with a minimum of $50.

Payments will be smaller, with stricter limits, for people without children. A single person with no dependents would qualify with an income of $15,980 or less.

Advocates say the extra money will go a long way for families that have struggled, especially during the COVID-19 pandemic that has hit lower-wage workers hard, even as companies like Amazon and Apple record huge profits.

Brenda Holland, a laid-off hospitality worker, teared up at Tuesday’s bill signing as she described her struggles with paying for her family’s basic needs, including medication.

While happy that the rebate finally would become a reality, it should not have taken lawmakers 13 years to follow through on their 2008 promise, said Holland, who is also an advocate with the state Poverty Action Network.

“Let’s not let another 13 years pass before we help working families and children. This is also just the beginning. We will be back because this marathon will continue,” she said.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com; . Seattle Times political reporter Jim Brunner covers state, local and regional politics.