OLYMPIA – The road to introducing a capital gains tax in Washington is a long one. Democrats have been pushing for it for years. Even before the talks about a capital gains tax, the state had to struggle with the introduction of an income tax. Over the past century, the state’s Supreme Court ruled an income tax unconstitutional and voters continued to reject proposals to implement such a tax.
Opponents of the capital gains tax say it is a kind of income tax and therefore unconstitutional. Proponents, on the other hand, say the final capital gains proposal will stand in court as the bill introduces a consumption tax rather than an income tax on capital gains.
Governor Jay Inslee signed the bill last week. There is a 7% tax on sales of stocks, bonds, companies, and other investments when profits exceed $ 250,000 per year. Exceptions are the sale of all real estate, livestock and small family businesses.
The state is expected to raise approximately $ 415 million for childcare and early learning. Revenue would increase from 2023.
The tax debate is far from over, however, as two potential legal disputes are already on the horizon.
Long history of tax debates
The debate over an income tax – and likely what the state Supreme Court must use to determine whether a capital gains tax is constitutional – boils down to the 14th amendment to the state constitution.
The amendment, approved by voters in 1930, says that all taxes in the state “must be uniform for the same class of property”. Property is defined as “anything, tangible or intangible, subject to ownership”.
Just two years after the amendment was passed, voters approved a tiered income tax that was only to be shot down by the state’s Supreme Court. In 1932, the court, in a 5-4 ruling, stated that the tax was unconstitutional because it viewed income as property that the constitution did not allow for incremental taxation.
Since then, lawmakers have tried to pass various forms of income tax to make the state’s tax system less regressive, meaning that lower-income taxpayers pay a greater proportion of their income for taxes than high-earners.
The state’s regressive tax system has always been brought up in the legislature, said former Spokane Democratic MP Dennis Dellwo. However, an income tax proposal has never been issued.
The legislature asked voters ten times about an income tax or a corporation tax. Every time it failed.
A capital gains tax was first imposed in 2012. The proposal would impose an excise tax on the sale of assets, stocks and bonds. Proponents argue that it is a consumption tax that is allowed under the state constitution. An excise duty is a tax on the sale of certain goods or services. Washington already has a real estate excise tax.
Opponents warn any other state that taxing capital gains treats them as income.
Dellwo, who served in the legislature in the 1980s and early 1990s, said he wasn’t sure how Democrats got the votes that year.
Jason Mercier, director of the Center for Government Reform at the right-wing Washington Policy Center, attributed this year’s passage to the more progressive policies of lawmakers. Although the breakdown of the partisans in legislation has not changed this year, the latest beliefs of the legislature have changed.
“The Democrats who came in were more liberal than the Democrats who replaced them,” he said.
Dellwo said he thinks the legislation has become more partisan in recent years, not necessarily more progressive. Rather than creating laws that work for both sides, Dellwo said the Democrats are “going on their own”.
Republican leaders say the capital gains tax passage this year is due to a change in leadership in the Democratic Party. House Republican leader JT Wilcox von Yelm said current Democratic assembly leaders were much more motivated to adopt a progressive agenda this year.
John Braun, chairman of the Senate Minority in R-Centralia, said the leadership has always embraced progressive policies but has never been as motivated to pass the capital gains tax. This year the Democrats “just got the votes,” he said.
Democrats, on the other hand, attribute their success to more diverse legislation that saw the impact of the COVID-19 pandemic on the state.
Speaking in a post-session press conference, Senate Majority Leader Andy Cheap, D-Spokane said the pandemic had exposed many institutional problems across the state and that it had increased the public and legislative momentum to push through many bills.
The capital gains debate is not over yet
Opponents have long said that if the tax passed lawmakers it would either be dragged into a referendum, similar to those that failed, or it would make it to the state’s Supreme Court, which could take the opportunity to decide otherwise Income tax.
The final version of the capital gains tax limits the possibility of a referendum. The final bill makes the tax “necessary to support the state government and its existing public institutions”. This sentence could prevent voters from voting in a referendum on the tax to overturn it.
Instead of the referendum, the way opponents fight the bill will be done through a lawsuit. The question in court will likely be: Are investment income income, and what is the constitutionality of Washington state tax?
At least two groups have either expressed an interest in or filed a lawsuit.
Conservative group Freedom Foundation, along with Seattle-based law firm Lane Powell, filed a lawsuit on April 28 to waive capital gains tax.
The lawsuit, filed in Douglas County Superior Court, alleges that a capital gains tax is an income tax and is unconstitutional in Washington. It calls on the court to declare the bill unconstitutional and prevent the state from collecting the tax.
“How often do we have to go this way?” Aaron Withe, CEO of the Freedom Foundation, said in a statement. “Capital gains are clearly income. And if you tax them, it’s an income tax – no matter what you call it. “
Another group, the Opportunity for All Coalition, also announced its plan to sue last week. In a statement, President Collin Hathaway said the capital gains tax “looks very much like a state income tax.”
“The state’s constitution clearly forbids this type of tax, which its supporters know,” he said.
Mercier said he did not know exactly how the court would rule but, given previous court rulings, he was “fairly confident” that the court would find this unconstitutional.
Proponents of the tax, on the other hand, are confident that it will stand up to a judicial challenge. House Appropriations Chairman Timm Ormsby, D-Spokane, told reporters he was never concerned about the tax going to the courts. There was never a reason not to fail, he said.
Opponents say Democrats are using capital gains tax to see how the current court stands on income tax. If the court rules that a capital gains tax is constitutional, opponents say it’s one step closer to a Washington income tax.
Dellwo said he doesn’t necessarily think that’s the case. Instead, the state Supreme Court will have the option to make another ruling on what taxes are legal and illegal in the state, and it will not necessarily give lawmakers the option to waive an income tax.