A capital gains tax might come to Washington. Here’s what it would do

A deep dive into the governor’s proposal.

Last week, the state legislature considered a capital gains tax on certain forms of investment income.

The discussions followed Gov. Jay Inslee’s December release of a three-year budget plan that included a proposed nine percent tax on certain capital gains over $25,000. In his proposal, Inslee criticized the state’s current tax code as disproportionately impacting lower-income people, calling it “the most regressive in the nation.”

Washington is one of seven states with no state income tax, and one of nine without a capital gains tax, making it an outlier among West Coast states; Oregon taxes capital gains at 9.9 percent in the highest tax bracket, while California taxes capital gains at 13.3 percent for the highest earners.

The proposed new tax is meant to help pay for a $54.4 billion three-year spending plan unveiled by the governor recently that includes new funding for education, mental health services, measures to reduce greenhouse gas emissions and fund clean energy research, and about $1 billion to protect endangered southern resident killer whales.

But what exactly is a capital gains tax, and who would be most impacted by it?

A capital gains tax is a levy on profits that result from the sale of assets like stocks, bonds, businesses, or commercial real estate properties.

Under Inslee’s proposal, capital gains above $25,000 for an individual or $50,000 for joint filers would be taxed.

For example, if you purchased stocks worth $1,000, and sold them for $3,000 five years later, you would not be taxed under the proposal. If you purchased stocks worth $10,000 and sold them for $50,000, earning a profit of $40,000, $15,000 – the amount above the $25,000 threshold – would be taxed at nine percent, for a total levy of $1,350.

The sale of residential homes would be exempt, as would retirement accounts, farms, forestry, and short-term capital gains from assets held for less than a year.

The tax is anticipated to affect about 1.5 percent of Washington households in its first year. According to an estimate from the governor’s office, if the tax had been in place in 2016, the average income of households affected would have been $660,000.

As in other states with a capital gains tax, the levy would be paid on top of the current federal capital gains levies. Under the federal tax code those who earn more than roughly $40,000 per year are subject to a long-term capital gains tax of 15 percent. Earners who make more than $434,000 per year pay 20 percent.

In the year 2021, the governor’s office estimates about $975 million would be raised by the proposed new tax.

Many Republicans in the statehouse have come out strongly against the proposal. Many say it is unpopular among their constituents, or believe it would slow growth, or even that’s it’s unconstitutional.

“This governor campaigned twice on not raising taxes, yet every budget he’s ever proposed has raised taxes,” said Rep. Drew MacEwen, R-Union. “It’s time to start reining in spending.”

The tax, he said, “does not pass constitutional muster.”

Many Republicans argue the proposed tax violates the state constitution by subverting the uniformity clause, which states that all property taxes – include income taxes – “shall be uniform upon the same classes of property.” This would preclude the exemptions, qualifications and cutouts provided by the current proposal.

But supporters of the tax say it’s not a property tax, nor an income tax, but an excise tax.

“The structure of the governor’s proposal has been set up as an excise tax on the sale of a capital asset,” said Misha Werschkul, executive director of the Washington State Budget and Policy Center. “It’s not based on income, but on a decision to sell some piece of a capital asset.”

Many Democrats and other supporters of the capital gains proposal say it would help level the playing field in the state, so that middle and working class earners do not pay so much more of their income on taxes than do wealthier residents.

“Washington has the most upside-down tax code in the country,” Werschkul said.

She cited a 2018 report from the Institute on Taxation and Economic Policy that showed the lowest 20 percent of earners in Washington pay about 18 percent of their family’s income toward state and local taxes, while the top one percent of earners pays just three percent.

“The wealthiest are not chipping in what they need to pay for schools, parks, and all of the other things that contribute to making our communities great,” she said.

Some supporters of the tax have cited the 2017 sale of about $1.1 billion worth of Amazon stock by Jeff Bezos, which was not taxed at the state level. Recently, Bezos announced plans to sell about $1 billion of Amazon stock each year to fund his space exploration venture.

Whether or not the tax ultimately passes, or faces a constitutional challenge, it will undoubtedly be revised by the legislature in the coming weeks and months. In an interview with the Seattle Times in December, state Senator Christine Rolfes, D-Bainbridge Island, chair of the senate budget writing committee, said the proposed budget is a “great blueprint” but said the tax plan is “probably more ambitious than the Legislature will be able to pass.” During a Senate hearing Wednesday, Rolfes said “This is just the start.”

Gabe Stutman is a reporter with the Kitsap News Group. Follow him on Twitter @kitsapgabe.

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