I know I’ve already written about the proposed capital gains tax several times but I keep seeing the same phrasing used to discuss it without the context of what it would mean for the state in both legal and competitive purposes.
It is very true that only 9 states don’t have a capital gains tax but the context for that is those are the 9 states that don’t tax income. This is because capital gains are taxed as part of the income tax code in the 41 other states. So if Washington was to adopt we would be the only non-income tax state to tax that type of income.
Because it is arguably an income tax there is one of two possible scenarios for when the Supreme Court would ultimately rule on it:
- They strike the tax for being unconstitutional thus blowing a big hole in the budget/McCleary plans; or
- They strike 80 years of precedent finding income is property and thus end the state’s prohibition on taxing all forms of income uniformly.
There is some suspicion that the reason the capital gains tax is being targeted is because there are some that believe the current justices would overturn the prior case law allowing income taxes in Washington without a constitutional amendment and they have been trying to find a test case.
All this to say, if one believes the most volatile form of taxation (capital gains) is a prudent thing to implement it needs to be done with eyes wide open realizing that Washington would be an anomaly for competitive purposes with the other non-income tax states and it should be done via a constitutional amendment unless one wants to run the risk the state Supreme Court would end the current prohibition on graduated, across-the-board income taxes in Washington.
Jason Mercier ([email protected]) is Director of the Center for Government Reform at Washington Policy Center.
An earlier version of this article appeared at http://www.washingtonpolicy.org/blog/post/dont-forget-full-context-proposed-capital-gains-taxes-washington/. Reprinted with permission.