The Washington State Legislature is considering Gov. Jay Inslee’s proposed budget, which includes a 9 percent tax on capital gains, despite a state ban on income taxes.
The proposed tax would apply to any profit made when selling stocks, bonds, or other assets with a purchase price above $25,000 for individuals and $50,000 for joint filers. Retirement accounts and sales of homes, farms, and forests would be exempted. The governor’s proposed 2019-2021 budget includes the tax.
“The proposal is designed to increase the share of state taxes paid by our state’s wealthiest taxpayers,” says Inslee’s budget plan, released on December 12. “In fact, if the tax had been in place in 2016, the average total income of affected households would have been nearly $660,000.”
The capital gains provision would raise $975 million in revenue during fiscal year 2021, the budget states.
Legislators are considering other tax measures, such as a fee on carbon dioxide emissions, as part of the budget process.
Skirting the Constitution
Inslee falsely claims the proposed levy is an excise tax in order to avoid constitutional provisions against income taxes, says Jason Mercier, director of the Center for Government Reform at the Washington Policy Center.
“There is no debate,” said Mercier. “A capital gains tax is an income tax,” Mercier said. “The IRS and every other tax authority in the country are in agreement that a tax on capital gains is an income tax.”
‘Third Rail’ of State’s Politics
The state would have to pass a constitutional amendment to implement a capital gains tax, says Mercier.
“The voters have been asked to approve an income tax eleven times, and they have rejected it every single time,” Mercier said. “An income tax is the ‘third rail’ of Washington politics. No one has wanted to touch it until now.”
The budget plan states “earned income from salaries and wages is not capital gains and would not be taxed at all.”
That distinction is false, says Edward Hudgins, research director at The Heartland Institute, which publishes Budget & Tax News.
“Washington state Democrats perhaps think that because it’s not salary income they can tax it and get around their state’s constitutional ban on taxing income,” Hudgins said. “That’s unlikely—capital gains are clearly income by every tax code definition.”
Headed for the Courts?
Inslee may hope to get a court to ignore the state’s constitution, says Mercier.
“The governor’s only option is to get a judge to rule that a capital gains tax is not an income tax,” Mercier said.
The Washington State Supreme Court sent a lower-court ruling striking down a city income tax in Seattle to the Court of Appeals in January. Several Democratic lawmakers filed an amicus brief arguing Seattle had a right to impose an income tax.
“Gov. Inslee and the Democrats are hoping to get a judge to impose a tax that has been repeatedly rejected by the people of Washington,” Mercier said.
Sees Urge for Control
Using the courts to overrule the constitutional ban on an income tax is in line with Democrats’ current ideology, says Hudgins.
“You can understand the push by Washington’s Democrat governor for a capital gains tax in part in terms of the dominant ideology and urge of most Democrats to control and redistribute as much of citizens’ wealth as they can get away with to satisfy their own feeling about what a ‘good’ society should be, and damn the dreams and desires of the individuals whose wealth is being taken,” Hudgins said.
“Capital gains is a special target because it is not salary income but income from investments individuals make that can help them secure their own financial future well-being without the aid of politicians,” Hudgins said.
Relying on capital gains tax revenue would be a mistake, says Hudgins.
“Such income, as a source of state revenue, is volatile, and states relying on it could find more budget shortfalls,” Hudgins said. “Residents of Washington State should appreciate what this attempt to tax capital gains in clear violation of the state’s constitution reveals about their elected officials.”
Ashley Herzog ([email protected]) writes from Avon Lake, Ohio.