Democrats’ Capital Gains Tax Passes First Legislative Hurdle

By Shauna Sowersby

Democrats have proposed several bills this session aimed at taxing the richest Washingtonians, and they passed one of them, a capital gains tax, out of the Senate Ways & Means Committee on Feb. 16, meeting an early session deadline. You can never count out fiscal bills in the state legislature, so some of the other bills, including a wealth tax, could factor in later in the session, but the capital gains tax, SB 5096, now has some momentum.

The bill is being sponsored by Sen. June Robinson (D-38, Everett), at the request of the state Office of Financial Management. Robinson is the Vice Chair of the Senate Ways & Means Committee.

The bill would impose a 7 percent tax on profits of more than $250,000 that result from the sale of certain assets, including stocks, bonds and mutual funds. Unlike a similar capital gains tax that was introduced in the House, Robinson’s version would exclude real estate sales. Other types of capital assets including retirement accounts, timber and certain types of agricultural land would be excluded as well. 

Wealthy households in the state currently only pay about 3 percent of their income in taxes, while the poorest pay more than 17 percent.

Scott Merriman, a legislative liaison for OFM, noted that the measure is a way to balance Washington’s tax code, which is one of the most regressive in the country. In addition to having no state income tax, Washington is one of just nine states that does not have a capital gains tax. Because revenue in the state is heavily dependent on property tax and sales tax, wealthy households in the state currently only pay about 3 percent of their income in taxes, while the poorest pay more than 17 percent, according to a 2018 report by the Institute on Taxation and Economic Policy. 

“This bill is a key part of helping to provide the resources to support the proposed expenditures in the budget for your consideration,” Merriman told the committee.

In Robinson’s bill, $350 million of the yearly revenue from the capital gains tax would go towards the state Education Legacy Trust Account, which would help fund education. The rest, an estimated $200 million, would be put into a new account called the Taxpayer Relief Account, whose exact purpose legislators have not determined. 

While Democrats and advocates from groups such as the Campion Foundation, a nonprofit that focuses on ending homelessness and protecting public lands, said the bill will provide balance to the state’s already upside-down tax structure in the state, Republicans, some small business owners and anti-tax activists argue that the capital gains tax is simply another way to impose an income tax, which is prohibited by the Washington State constitution.

“[The] IRS classified capital gains as an income tax, yet the governor and his fellow Democrats completely disregard the IRS and the Washington State constitution,” Ted Devol, a small business owner, testified. “We voted against this multiple times and here you are doing it again,” he told the committee. 

Those testifying against the measure also argued that adding new taxes during the pandemic would put a strain on Washington State residents at a time when economic recovery is needed.

However, Andy Nicholas, a senior fellow for the Washington State Budget and Policy Center, countered that the tax is nothing more than an excise tax, and that only the extremely wealthy would be impacted by the legislation.

“Due to the lasting effects of institutional racism, capital assets remain heavily concentrated among a small group of very wealthy and almost exclusively white households in our state and in our nation,” Nicholas testified. “Taxing profits from their sale and investing the revenue into education, health care, child care, and other community needs would help begin to address the widening racial wealth and opportunity gaps in our state.”

The proposal passed out of Ways & Means along party lines last week, meeting this week’s February 22 cutoff deadline for legislation to move out of fiscal committees, and is now awaiting a second reading in the Rules Committee. If the bill passes through both chambers and Gov. Jay Inslee signs it, the tax will go into effect immediately due to an emergency clause.

If it does pass, both sides of the aisle anticipate a legal fight.

Democrats have proposed several other progressive tax bills aimed at making the wealthy pay more in Washington, including a bill that would tax the wealth, or “intangible assets,” of the richest state residents at 1 percent. According to the Department of Revenue, the bill would increase state revenue by at least $2.5 billion by 2023. Another bill would increase a tax on estates valued at $3 million or more in order to address homelessness and inequities in homeownership. 

Despite this week’s nominal deadline, per longstanding legislative rules around budget bills, there’s certainly a chance those bills, or any of the other tax-related bills, could still wind up playing a role as part of revenue and budget deals throughout the session.

“It’s by design that we have not moved some of those bills yet,” said Rep. Noel Frame (D-36, Seattle), who serves as Chair of the House Finance Committee, and is sponsoring the wealth tax. She explained that certain tax bills are going through a process internally and noted to, “give them time to simmer.”

Rep. Tina Orwall (D-33, Des Moines) told PubliCola that even though her estate tax bill didn’t make the cutoff, she still thinks it remains on a list of possible revenue options later in the session. She also said she is “encouraged” to see the capital gains tax moving through the Senate. 

There’s also the possibility that legislators could introduce new tax bills that haven’t been seen or even discussed publicly before the end of the 105-day session. In 2019, for example, Democrats passed a tax on big banks with two days left to close out the legislative session. The bill passed without public hearing and without going through the typical legislative process. 

At the time, Democrats defended the move because they were unable to get a capital gains tax passed that year.

One thought on “Democrats’ Capital Gains Tax Passes First Legislative Hurdle”

  1. It’s great that this is still alive is great, but to have ALL real estate sales exempted makes no sense and is a gift to the real estate lobbyists

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