A Senate bill that would impose a tax on capital gains in Washington state looked much different from its original form when it passed out of the Senate Ways & Means Committee Tuesday evening.
With the changes, the new proposal is predicted to bring in less revenue than the original and affect fewer taxpayers.
The bill was requested by the Office of Financial Management and was part of Gov. Jay Inslee’s proposed operating budget. It originally proposed a 9% tax on capital gains earnings — such as the sales of stocks, bonds, and other assets — above $25,000 for individuals or $50,000 for joint filers. It included exemptions such as sole proprietor businesses, homes, farms, and retirement accounts.
Sen. June Robinson, D-Everett, introduced the bill and added a striking amendment ahead of Tuesday’s committee vote. Robinson said she amended the bill to address concerns heard in its public hearing.
The new version lowers the tax rate to 7% and increases the threshold earnings have to exceed before the tax kicks in to $250,000 for individuals — increasing the threshold in the original bill for individuals tenfold. The same threshold applies to joint filers, according to staff.
The striking amendment also changed and added exemptions, including an exemption for “qualified family-owned small business” that replaces and broadens what was the sole proprietorship exemption. It also exempts all sales and exchanges of real estate.
“We heard great feedback from community members across the state, in large part thanks to remote testimony making it easier for folks to weigh in,” Robinson said in a press release.
“By raising the threshold and expanding exemptions, this capital gains proposal would increase the share of state taxes paid by just 2% of the very wealthiest Washingtonians. It’s a reasonable way of asking those wealthy few to join the rest of us in building a stronger, healthier state for all Washingtonians — a state in which they have thrived.”
The original bill was predicted to bring in $1.1 billion in new revenue in fiscal year 2023 and more than $2.4 billion in the next biennium. Now, it’s predicted to bring in an estimated $550 million per year, according to staff.
Inslee’s proposal was estimated to impact about 1.9 percent of residents. Far fewer people will be impacted by the new version, staff says, but the same level of analysis isn’t yet available. For now, they’re still communicating 2 percent as a generous estimate, though they know it will be lower.
“We do anticipate it actually affecting many fewer people than the original proposal, because we significantly raised the threshold of capital gains that’s exempted,” Robinson said.
Revenue from the new tax, which would go into effect in 2022, would go into the education legacy trust account and a new “taxpayer relief account.” The account isn’t defined in the bill. In a phone interview Wednesday, Robinson said the intent would be for future Legislatures to use the money to address unfairness in the state’s tax system.
Gov. Inslee said at a virtual news conference Tuesday that he hadn’t seen the amended proposal so he couldn’t comment on it. Democrats have proposed a capital gains tax in previous years and bill it as a way to start addressing the state’s regressive tax system by placing a heavier tax burden on wealthy residents.
Republicans consistently object to the idea, in part saying it’s a tax on income and therefore in violation of the state Constitution.
David Schumacher, director of the state’s Office of Financial Management, said in December that the legal analyses he’s seen assume the tax is legal and that the state can count on it.
Republicans brought forward 22 amendments to the substitute bill Tuesday. Some were withdrawn before reaching a vote, and the rest were rejected.
The amendments proposed changes such as increasing the exclusion threshold based on inflation starting in 2024, delaying it until the Legislature reviews recommendations from a tax structure work group, and putting the law in front of voters.
The bill includes an emergency clause that exempts it from the referendum process.
“Let’s let the voter decide if they want this capital gains income tax in the state of Washington,” said Sen. Lynda Wilson, ranking member on the Ways & Means committee. “They’ve only told us 10 times that they don’t want an income tax, let’s just let them tell us an 11th time.”
Sponsor Robinson replied that the bill is proposing an “excise tax on long-term capital gains” and legislators are elected to represent their constituents. Wednesday, she also pointed out that it could still go to voters through an initiative.
The substitute bill passed mostly along party lines in the committee, with Sen. Mark Mullet, D-Issaquah, voting no and Sen. Kevin Van De Wege, D-Sequim, voting without recommendation.
A House bill that proposes a tax on capital gains had a public hearing in the House Finance committee last week.
That bill proposes a 7% tax on capital gains from the sale of real property and a 9.9% tax on the sale of other assets. It exempts up to $200,000 for individuals or $400,000 for joint filers.
Funds in that bill would go to the state’s general fund and an account created in a separate bill to support child care and early learning. The lawmakers are coordinating, Robinson said, talking to each other about similarities and differences.
“We are talking to each other, they are separate proposals, and only one will possibly get to the governor’s desk,” Robinson said. “It is our intention to pass the version that we passed out of Ways & Means last night off of the Senate floor and send it to the House.”
Bills typically get negotiated at that point, Robinson said. The Senate bill will now go to the Rules Committee and could be called to the floor for a vote by the full chamber.
