Why is the income tax on capital gains being kept on life support?
By Rep. Peter Abbarno
Despite having a $15 billion surplus burning a hole in its pocket, the Washington State Legislature left Olympia on March 10 without delivering any meaningful broad tax relief for working families or small businesses. Investing in families and businesses through broad tax relief is about trust.
I believe my community members know their needs and priorities better than Olympia, which is why I advocated for using the record surplus for meaningful tax relief. Their needs and struggles are real. Unfortunately, instead of giving money back to the taxpayers, the governor and his majority party spent the historic surplus while continuing their fight for an income tax!
Last year, the Legislature passed Senate Bill 5096, which imposes a 7% tax on the amount of capital gains reported on an individual’s federal income tax return. There is a standard exclusion of $250,000 per year, and some other exclusions. As a reminder, Washington voters opposed various forms of an income tax no less than 10 times on the ballot and will likely have another opportunity in November.
On March 2, Douglas County Superior Court Judge Brian Huber ruled the new capital gains tax unconstitutional, saying it “shows the hallmarks of an income tax rather than an excise tax,” as argued by some state lawmakers. The characterization of SB 5096 as an ‘income tax’ is also consistent with the United States Department of Revenue’s definition. Immediately following the ruling, Attorney General Bob Ferguson pledged his office will appeal the judge’s ruling.
The legal debate stems from the language in the Washington State Constitution, Article 7, Section 1, that states in part, “All taxes shall be uniform upon the same class of property within the territorial limits. . . .” Is it unconstitutional to impose a non-uniform tax on the same class of property in the state of Washington? I believe it is and that is how the income tax on capital gains would apply.
Despite Huber’s ruling against the capital gains income tax, the Legislature drafted and passed an operating budget that assumes the revenue from the income tax just found unconstitutional. The 2022 operating budget increases spending 10.5% or $6.2 billion over the last biennium — the largest supplemental spending plan in state history.
The economic debate stems from whether an income tax on capital gains is necessary. First, there is an argument that Washington state has among the most “upside down and backwards” tax systems in the country. If Washington state’s tax structure needs to be fairer, I propose increasing the Working Families Tax Credit, eliminating burdensome regulations for small businesses, and incentivizing economic development in rural and marginalized communities. Reducing the tax burden on the families that need the most relief makes the most economic senses.
Second, Washington state was sitting on a $15 billion budget surplus. Tax and fee increases remain unnecessary. There is sufficient revenue and projected revenue for tax relief and still fund the necessary programs passed by the Legislature.
Third, the absence of an income tax is an incentive to attract business to Washington state and create jobs. The Washington State Department of Commerce referred to the lack of an income tax as a “competitive advantage” and “great marketing” for Washington. According to Commerce, no income tax creates economic opportunities and investments in our state. I agree.
Finally, if there is ever a “right” time to increase taxes, this certainly is not the time. The top issues community members discuss with me are the skyrocketing cost of living, inflation, and taxes. Working families at the kitchen table are trying to balance their checkbook as the cost of gasoline eclipses $4.50 a gallon. Last month, flour and prepared flour mixes were 14% higher than 2021, butter was up 14%, milk was up 13%, and some stores were beginning to ration infant formula.
In spite of Huber’s ruling and the uncertainty of the income tax, the Washington State Economic and Revenue Forecast Council (ERFC) recently adopted an official outlook based on the 2022 supplemental budget that assumes capital gains tax revenue. Thankfully, two Republican legislators – Rep. Ed Orcutt and Sen. Lynda Wilson – requested an outlook that excluded revenue from the capital gains income tax so the public could see the accurate economic outlook.
Ultimately, the Washington State Supreme Court may be the final voice on whether the income tax under Senate Bill 5096 is constitutional. But the constitutionality of an income tax is only one question that needs to be answered. The other question is whether the state should impose an income tax on capital gains, even if it can. The People may ultimately decide that questions, again.
The insatiable appetite for more taxes and record spending must end and abandoning the push for an unconstitutional and unpopular income tax on capital gains should be the first step. The best investment our government can make right now is in you, your business, and your local community. I trust you with your money and so should Olympia.
Rep. Peter Abbarno represents the 20th Legislative District in the Washington State House of Representatives. Rep. Abbarno is a local attorney and business owner with a Master of Laws in Taxation from the University of Washington.
Learn more about how you can donate and support the re-election campaign for State Representative Peter Abbarno at www.ElectPeterAbbarno.com