Capital Gains Tax, Stalled in Previous Sessions, Moves Forward

By Shauna Sowersby

As another major cutoff date in the Washington State Legislature approaches, the once-controversial capital gains tax appears to have more momentum this year than it has since the idea was introduced nearly a decade ago. 

The bill, which is headed for a likely Senate vote today, would impose a 7 percent tax on capital gains—profits on the sale of assets such as stocks—over $250,000.

Legislators have until March 9 to pass the proposed capital gains legislation out of the Senate where it was originally introduced. A variety of factors have changed the prospects for a capital gains tax since similar  measures were initially floated in 2015.

The most obvious factor: the global COVID-19 pandemic.

Senate Majority Leader Andy Billig (D-3, Spokane), tacking to Democrats’ agenda, told PubliCola the bill has more momentum this year than he has seen in previous years for two reasons: uneven economic recovery and a child care crisis that has been “revealed and exacerbated” by the pandemic.

In order to deal with those issues, Billig said, legislators have two goals in mind. First make the tax system more fair. And second: “increase support for families and workers with child care expenses.”

Each year, the first $350 million in revenues from the tax would go into the Education Legacy Trust Account, which would help support schools and access to education. The rest of the anticipated revenue would be put into a new Taxpayer Relief Account. 

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An updated fiscal note issued by the Office of Financial Management reported that only about 8,000 taxpayers would pay capital gains taxes. Those who would owe the tax would have their first taxes due in 2023, producing estimated revenues of more than $522 million, with revenues expected to climb to more than $609 million by 2027.  

There could be other reasons the bill has more support now than in the past. 

A staffer for the Senate Democrats believes there’s been a shift in narrative. The pandemic has laid bare the class divide in the state, the Democratic source said, and Washington state residents have begun to realize the upside-down tax structure is unfair for the working and middle class.

Small business owners are speaking up. During a press conference earlier in the week, Karla Esquivel, owner of the Andaluz boutique in Columbia City, added that the tax would help customers because fixing the regressive tax code would allow them to ultimately have more spending money, which in turn would be beneficial to local businesses.

Another reason the bill actually has a chance to pass the Senate—historically, the place where it hits the skids—is because Democrats have control of the chamber, which was not the case until 2017. Moreover, in the past, some Democrats such as Sen. Steve Hobbs (D-44, Lake Stevens) have been against the capital gains tax. The balance appears to have shifted somewhat, although not entirely. With the debate front and center, some of those Democrats who still find themselves on the fence may have a harder time avoiding the issue.

Hobbs, a moderate Democrat, has already introduced an amendment to eliminate the emergency clause, a move that could upend the bill without challenging the premise of the idea. An emergency clause would mean the legislation would go into effect immediately, rather than later in the year like bills without such a clause.

Rep. Noel Frame (D-36, Seattle) justified the need for the clause during the press briefing this week, though, saying “now is the exact time” for the bill, including the emergency clause, because a federal relief package for Washington State is expected to include more than $4.2 billion in up-front funding. That money, she said, should be used as a “bridge” for more permanent support. Frame added that it shouldn’t take a global pandemic in order to fund economic recovery in the state.

Other disagreements from some Senate Democrats might lead to some “no” votes on the floor.

In an email to PubliCola, Sen. Mark Mullet (D-5, Issaquah) said his constituents don’t support the new tax, and that he wants to “make sure their voices are heard and faithfully represented.” He also said his “top priority is protecting the ability of voters to challenge this measure on the ballot.”

“I don’t support the creation of new taxes when our state has revenue to build a sound budget that does not cut safety net services and also makes important investments in education,” Mullet added.

Mullett doesn’t sound dissimilar to Republicans, who argue that the capital gains tax is unnecessary, especially during a time when the state is dealing with the pandemic. Additionally, they have stuck to their assertion that the tax is unconstitutional because it is considered an income tax, not an excise tax, as some Democrats and advocates for the legislation have claimed.

While there are still many uncertainties about the future of the legislation, the bill is anticipated to make it to the floor for debate on Saturday. The bill is expected to run the same day as the Fair Start Act, SB 5237, which would fund child care and early learning programs. Sponsors and co-signers of the bill are also prepared for multiple amendments to be added to that bill as well as the capital gains tax.

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