Washington state voters to have say on contentious capital gains income tax

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Voters in Washington state will get their chance to weigh in Tuesday, at least symbolically, on the controversial new capital gains income tax set to go into effect on Jan. 1, 2022.

Advisory Vote No. 37 asking whether the tax increase should be maintained or repealed is non-binding. It does, however, offer Washingtonians the chance to send lawmakers and Democratic Gov. Jay Inslee a message about their feelings regarding a tax that was approved on the last day of this year’s legislative session without a single Republican vote and includes a provision that cuts out the right of referendum.

The law imposes a 7% tax on capital gains above $250,000 for individuals and joint filers from the sale of assets such as stocks and bonds. Exceptions include the sale of real estate, livestock, and small family-owned businesses.

Voters have yet to chime in on the subject, but the nascent tax – already the subject of multiple legal challenges – seems to be facing an historical uphill battle beyond its last-minute, partisan passage by lawmakers before being signed into law by Inslee on May 4.

Inslee has characterized the new tax as an issue of fairness.

“It is a big stride to more justice by overturning the upside-down tax system which has been so unfair to Washingtonians for so many decades,” Inslee, who first proposed a capital gains tax in 2014, said at the signing ceremony.

The highest-ranking Republican in the House recommends people vote to repeal the tax on Advisory Vote No. 37.

“They need to send a message to the Legislature that enough is enough,” House Minority Leader J.T. Wilcox said, noting the state is experiencing record high revenues and rate of growth.

He hinted at the prospect the capital gains income tax is part of a plan by Democrats to impose a general income tax on Washington.

“Nobody really believes that a tax on people in some subgroup is going to say with that subgroup,” Wilcox said. “Everyone knows that taxes expand.”

Nevertheless, supporters of the tax, including Inslee, are calling the capital gains tax as an excise tax in an attempt to get around the state constitution’s prohibition of a progressive income tax. In general, an excise tax is a tax imposed on the sale of specific goods or services, or on certain uses.

Article VII, Section 1 of the Washington State Constitution states, “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.”

For nearly 90 years, the Washington State Supreme Court has ruled that income is property as defined by the state constitution, effectively prohibiting a graduated income tax. In 1932, Washington voters approved by a 70% margin a progressive income tax to pay for education. The following year, the state Supreme Court invalidated the tax in its Culliton v. Chase decision, noting “it would certainly defy the ingenuity of the most profound lexicographer to formulate a more comprehensive definition of ‘property’ than that found in the Washington State Constitution.”

Since then, the state Supreme Court has consistently ruled that income is property. In a one-page 1960 decision, Apartment Operators Association of Seattle, Inc. v. Schumacher , the high court advised “the constitution may be amended by vote of the people.”

Voters in Washington state have since rejected six constitutional amendments allowing a progressive income tax, as well as four income tax initiatives.

Moreover, the Internal Revenue Service and state departments of revenue recognize capital gains as income.

Opposition to income taxes continues to spread in Washington state in the form of one county and ten cities having acted to ban a local income tax, including Longview, Battle Ground, DuPont, Grange, Kennewick, Longview , Moses Lake, Richland, Spokane, Spokane Valley, Union Gap and Yakima County. On Tuesday, voters in the city of Yakima will consider a charter amendment to ban a local income tax.

Across the ideological spectrum, Washington state’s capital gains income tax has drawn negative scrutiny.

The Tax Foundation, based in Washington, D.C., was critical of the new tax, taking particular issue with the notion that an excise tax and an income tax would cease to be different if only politicians stopped labeling them differently.

“As legal reasoning goes, the excise tax argument is weak, since the tax adopted by the legislature in no way functions like an excise tax,” wrote Jared Walczak, vice president of State Projects with the Center for State Tax Policy at the Tax Foundation, in an Oct. 25 analysis . “Not only are capital gains taxed as income in every state with an income tax, and by the federal government, but the proposal here is not to tax the transaction but rather the net – which is to say, the net income.”

He went on to note, “The tax on capital gains transactions, or the privilege of buying and selling investment instruments. It is on the net gains and losses over the course of a defined period. That is decidedly an income tax – on a narrow class of income, but an income tax nonetheless. Across the country, courts have historically cared about substance over form when it comes to taxation, and certain substance over name. Simply styling a tax on a class of income as an excise tax doesn’t change its fundamental character.”

Back in the other Washington, the more liberal Seattle Times urged a “no” vote in an editorial originally published on Sept. 26: “A judge will decide whether the Washington’s Legislature’s hastily enacted capital-gains tax violates the state constitution, but voters should signal their displeasure by encouraging lawmakers to repeal Advisory Vote No. 37.”

The Seattle Times editorial board concluded by saying, “The least state lawmakers deserve for their premature maneuver is a collective thumbs down from the people they’re supposed to represent.”

Wilcox went further in his advice to voters casting their ballots.

“And then I think they need to send an even stronger message when they vote for their representation,” he said. “That’s how you really change the mindset that we always have to have more and more government.”

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