Opinion: Capital gains tax is wrong for many reasons

Gov. Jay Inslee offered an interesting idea back in December when he visited with the Herald-Republic to explain his proposal for the 2021-23 state operating budget.

Championing his desire for more equitable taxation, he challenged Republicans in the Legislature to approve his proposal for a capital gains tax — an idea put forth for the past several years by Inslee and other Democrats in Olympia but one that never had the votes.

If Republicans were confident that the courts would rule a capital gains tax unconstitutional as an income tax — which is prohibited in this state — then vote yes, he said, and let’s go to court.

In the interim, the 2021 session began and Senate Democrats crafted SB 5096, a bill that would create a 7% tax on certain capital gains of more than $250,000 in a year. Exemptions include real estate transactions, much of the farming sector and retirement accounts.

Inslee’s original plan was more ambitious: a 9% tax on gains that would start as low as $25,000 for individuals and $50,000 for joint filers and that included real estate profits.

SB 5096 had a public hearing in January and now sits in the Rules Committee. The bill’s sponsor and the Senate’s top Democratic budget writer have said they believe SB 5096 has enough votes in the Senate.

The Herald-Republic editorial board has viewed previous attempts at establishing a capital gains tax with healthy skepticism.

“House Democrats,” we wrote in May 2019, “spurred by Inslee, optimistically put a 9.9 percent capital gains tax on stocks and bonds in their budget, though it was clear that the Senate had no stomach for the legal hassles sure to follow since, remember, the Washington Constitution forbids an income tax. And despite some mighty spin — House leaders called it the ‘Extraordinary Profits Proposal’ — the idea stalled, saving much hand-wringing and suit filing.”

Although the editorial board personnel has changed over the past several years, that skepticism remains. Among our reasons:

• A capital gains tax is by all definitions an income tax, no matter how lawmakers otherwise describe it (the bill calls it an excise tax). As such, its constitutional status in Washington, where court precedent clearly labels income as property and therefore not subject to a graduated income tax, is dubious on the best of days.
• As such, passage of a capital gains tax would likely lead to a long and costly court fight.
• Even if the tax somehow passes constitutional muster, the citizens of Washington have spoken on the matter. Voters have soundly rejected efforts to establish an income tax in Washington numerous times.
• Despite pandemic-related issues that have affected state revenue collection, we appear to be in the midst of a relative time of plenty. Whatever the final numbers, the 2021-23 budget is bound to be considerably higher than its predecessor. Revenue should not be an issue. Potential revenue from the capital gains tax down the road — an estimated $550 million per year — isn’t needed.
• The Legislature and state officials should be focused not on another tax on the relatively affluent — a tax that offers absolutely no direct tax relief to lower-income Washingtonians — but rather on overall tax reform. A bipartisan study group is at work right now seeking ways to make the state’s tax structure fairer. This group should be given a chance to present its findings before the state implements more unnecessary and possibly unconstitutional taxes.

Historically, Democrats in Olympia who have favored a capital gains tax have been held in check not just by Republicans but by more moderate Democrats. It’s time again for moderate Democratic lawmakers to see reason, make their objections heard and stop unneeded SB 5096 in its tracks.