The capital gains income tax is not a “reform” – just a new tax

Senator Brad Hawkins
The Washington State Senate on March 6 voted 25-24 to pass Senate Bill 5096, a proposal that seeks to create a state income tax on capital gains. The Senate’s passage of this new tax is beyond disappointing, although not entirely unexpected. This proposal has been a concern of mine for the past several years, and it finally advanced through the Senate this year. In the past, the Senate has been a helpful backstop against many new tax ideas. In recent years, either Republican senators or conservative Democrats helped block this particular tax, but I’m afraid the recent 25 to 24 vote shows that the once-strong Senate firewall sadly no longer exists to protect Washington citizens from any type of new taxation.
The new tax does not “reform” anything
Washington state does have a “regressive” tax system, meaning that our lower-income population pays a disproportionally greater percentage of their income in taxes. This is due largely to the state’s reliance on sales tax as its main source of revenue along with the business and occupation tax and other smaller sources of revenue. Many supporters of a state income tax believe it to be a much-needed change to help our state reform its “upside down” tax code. However, Senate Bill 5096 does nothing to reduce regressive taxes in our state. It just adds a new, additional tax to grow government. If the idea were to propose an income tax – and cap it – while also correspondingly reducing the state sales and business taxes, that would be a much different conversation. Unfortunately, that isn’t what is being considered.
State tax proposal now before the House of Representatives
I anticipate that Senate Bill 5096 will continue to advance in the House and ultimately reach the governor’s desk. If that happens and the governor signs it into law, it could become subject to a statewide referendum where all Washington voters could have a say in whether to approve the tax. Washington voters have rejected income tax proposals before. If the bill does pass and is affirmed by statewide voters, the new tax can expect an immediate court challenge regarding its constitutionality. Variations of this tax have been considered in the judicial branch before. The Internal Revenue Service considers capital gains to be income, and the state Supreme Court has long held that income is “property” and property must be taxed uniformly, not at graduated rates.
New capital gains income tax likely headed to Supreme Court
Unfortunately, I no longer trust the current state Supreme Court to interpret this issue similarly to the justices on our state’s prior high courts. With the state Supreme Court’s recent McCleary decision on education, Hirst decision on water use, Sakuma decision on agricultural wages, Blake case on drug possession, as well as most other recent tax reduction and wage issues, the current court has shown a real interest in co-opting legislative branch responsibilities to authorize policies and increase state revenues. I have growing doubts that this particular court will strike down any state income tax measure as unconstitutional, if one comes before it.
Tax advocates see “window of time” to pass the new tax
My sense is that Governor Inslee and pro-tax legislators in Olympia understand that they have a “window of time” now not only to pass the bill when they control the Legislature but also to do so when the makeup of the state Supreme Court is very favorable to taxes. March 6 was a day that I have been anticipating for a while, but it is still difficult to absorb. And make no mistake, while the bill is currently messaged as a tax only for the wealthy and, as drafted may not currently impact middle-class families, if it is approved and the court upholds it, the exemptions will eventually be whittled away over time to the point where we are all impacted regardless of our income. So that doesn’t reform our taxes in any way. In the end, it’s just more taxes.
Senator Brad Hawkins serves as our 12th District State Senator representing North Central Washington.



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