Capital gains tax gets a harsh reception

OLYMPIA — A different take on Gov. Jay Inslee’s capital gains tax, less broad and friendlier to small family-owned businesses, will likely be introduced later in this year’s legislative session.

“We are considering proposals similar to what the House has considered in years past,” said Rep. Noel Frame, D-Seattle. “So, for instance, the filing threshold has been higher in the past House versions, so that's one major difference. Also what we have had the last several years is an exemption for bona fide family owned businesses.”

Frame emphasized the goal of any tax she and fellow Democrats propose is not to raise the burden on the general public, but to make sure those who are wealthiest pay their fair share.

“Low-income people pay six times more in taxes of the share of their income than the wealthiest Washingtonians,” Frame said. “So, our great hope is that any new tax policies that we're having is good policy and it's taking us a step toward making the tax code more equitable.

The bill as originally presented received a harsh reception from small business owners and Republicans.

It proposed a 9% tax on profits realized from selling investments such as stocks and bonds and other property. A capital gains tax is the revenue centerpiece in Gov. Jay Inslee’s proposed budget.

As originally proposed, Senate Bill 5096 would take effect Jan.1, 2022, on all capital gains over $25,000 for individuals, and over $50,000 for joint filers.

At its first hearing Jan. 14, some said the bill was a disingenuous attempt to implement an income tax, which is not allowed under Washington’s constitution.

“Our budget is balanced right now, there's no need to raise any taxes or create new ones,”

said Sen. Lynda Wilson, R-Vancouver. “The problem with this income tax is that it's an income tax and it’s not an excise tax. Washingtonians have said six different times that they do not want an income tax.”

Long-term capital gains are reported on federal income taxes, but typically are taxed separately from other income and at lower rates.

If the bill is passed in its current form, Wilson said it almost certainly will be challenged in the courts.

“If they don't change their precedent from the 1930s when they came out and said income is property, then it should be” ruled unconstitutional, Wilson said. “Every other state’s revenue departments tell us that they count this as income tax, so I don't know how we could be an outlier in one state trying to claim that it's an excise tax.”

Additionally, Wilson stated that she believes if this tax passes as proposed, it would create the structure for eventually implementing a traditional income tax on citizens.

While Democrats say the bill is mostly intended to tax the sale of long-term stocks and bonds, the selling of businesses and non-residential real estate are not exempt from the tax, leaving many worried about unintended consequences.

“It's funny that when they talk about that, ‘This is a tax on the rich.’ I'm sorry but I don't feel rich,” Lois Cook said with a laugh after testifying on the bill.

Cook has run America’s Phone Guys, a small business telecommunications retailer, with her husband since 2004. She was among the more than 100 people who testified on the bill at its first public hearing on Jan. 14.

At the hearing, Cook expressed concerns that were echoed through the night. In its current form, small business owners and landlords who are relying on the eventual sale of their business or property for retirement are worried about how the tax could impact their future.

Cook admitted she and her husband have already discussed moving to a more tax friendly location, and if the tax is passed unamended, they would likely move out of state.

She also said that she likes the concept behind the tax, and would support it if there were exemptions for small business sales.

Current exemptions in Inslee’s proposal include residential dwellings, assets held in a retirement account, livestock, timber and capital assets for a trade or business of a sole proprietorship among several other examples.

Jacob Vigdor, faculty legislative representative and professor of Public Policy and Governance at the University of Washington, was among those who voiced support. He did so on behalf of the more than 4,500 members of UW faculty.

“Something that comes up perennially is this notion that we're worried about the regressive nature of taxation in Washington state...I think it's just important for us to sort of make it known that we understand that support from the state is part of what makes the University work, and, you know, if we had our druthers, we would have that support be funded by a more progressive tax system.”

Vigdor also said worries about a slippery slope with more taxes immediately following is mostly unfounded.

“Given the difficulty of passing progressive legislation, and given the ballot propositions that can pop up when something passes, I don't see a slippery slope,” Vigdor said. “I mean, if there is a slope it's not slippery, it's more like sandpaper.”