The House Finance Committee held a public hearing today on HB 1496 (Income Tax on Capital Gains). First of all, I would like to thank Chair Frame for how she conducted the hearing. With 70 people who tried to testify, I didn’t expect to get 90 seconds. Rep. Frame has also been very generous with the deadline for a person who needs an interpreter for the testimonial, reminding those who have not been called to leave written comments. The only person who was muted while testifying was a Seattle city council who disobeyed the rules of decency. Everyone else was asked to end their testimony instead of being muted.
As for the content of the hearing, here was my testimonial on HB 1496 (48:34):
I also provided the members of the Finance Committee with this background from nearly a decade of research on the subject:
- September 25, 2018 letter from the IRS: “This is in response to your inquiry about the tax treatment of capital gains. Are you wondering whether the capital gains tax is considered an excise tax or an income tax? It’s an income tax. In particular, capital gains are treated as income under tax legislation and taxed as such. “
- State Revenue Departments describe capital gains income taxes: I personally contacted the finance department for each state. Each state said that capital gains are income and are taxed as income tax. Countries with no income tax therefore do not tax capital gains. Some states with income taxes offer credit or exemption from capital gains.
- Capital gains taxes are extremely volatile: I asked the tax officials of every state this question about their capital gains taxes: “Was this source of government tax revenue reliable and stable, or is it generally more volatile and unpredictable?” Not a single state said capital gains taxes are reliable and stable. Here is the answer from California: “California’s tax revenue has many elements of volatility, but one of the more significant sources of revenue volatility is the state’s tax levies on net capital gains through personal income tax.”
- 2014 California Constitutional Amendment: “This constitutional amendment separates government spending from the roller coaster of revenue volatility. This action will remove capital gains that represent more than 8% of the general fund – the average over the last 10 years – instead of being used for unsustainable permanent tax cuts or ongoing programs. “
- 1960 Supreme Court decision prohibiting graduated income tax: “The argument is again being pressed on us that these cases were wrongly decided. However, the court is not ready to step down from the position announced in its repeated decisions. The attorney general urges, among other things, that the outcome should turn out differently now that the state is facing a financial crisis. In this case the constitution can be changed by popular vote. Such a constitutional amendment was rejected by referendum in 1934. “
- If the bill moves, I encourage you to add this amendment to clarify that the aim of the bill is not to repeal the Supreme Court case law prohibiting tiered income tax: Proposed change – “The legislature recognizes a well-established precedent that declares income as property. Legislators also recognize the fact that the state’s voters rejected six constitutional amendments to income tax. If capital gains tax is challenged in court, the attorney general is prohibited from asking the court to reconsider its previous rulings on declaring income as property. “
- “Choose Washington” – No Income Tax: The Washington Department of Commerce has emphasized for years that the state with no income tax is a competitive advantage for employers. That fact, and the impact of the current capital gains tax discussion on employer decisions, was recently highlighted by one of WA’s newest CEOs to move out of California – Tanions Orion Hindawi. He said, “Essentially, even if nothing happened, today’s narrative in Washington is that they don’t want to keep up what Nashville, Austin, Miami and a number of other places say they want to keep up. Which is very attractive to entrepreneurs. People can argue about whether it’s right or wrong, that’s a little irrelevant. The real question is whether or not these people should move into your state. If you are ready to accept the fact that they are not moving into your state and bringing those jobs with them, then put the guidelines in place. . . People have to be fully aware, there are many people who currently call themselves Seattle or Washington residents and don’t have to be tomorrow. “
Among those who testified today was Joe Bishop-Henchman, vice president of the National Taxpayers Union Foundation. Here was his testimony (1:37:19):
“My name is Joe Bishop-Henchman and I am Vice President of the National Taxpayers Union Foundation, a non-partisan research and education organization based in Washington DC. I have written over 100 studies on tax policy and testified on tax policy issues in 36 countries.
Make two points.
First, this tax will be incredibly volatile. The fluctuations in investment income vary from year to year between 91% and 200%. If one of the stated goals of introducing this tax is to improve the stability of tax revenues, it will have the opposite effect and harm all annual programs that would depend on this revenue.
Second, this is an income tax, not a transaction tax. Transaction taxes do not have exemption levels, nor are they levied on annual sums, nor do they track filing deadlines and federal income tax requirements. State income taxes do all of these things. Taxpayers fill out a tax return due on the same day as federal income tax, and the tax base is derived from capital gains that are taxed under federal income tax and state income taxes. The IRS, every other state, and every tax professional all agree that capital gains are income.
There is a doctrine known as substance over form that taxpayers are penalized for getting too smart in referring to income as anything else. What example is there when the legislature does the same? “
A very good question.