Are capital gains tax supporters confusing their proposal with a financial transaction tax?

By JASON MERCIER  | 
Feb 18, 2021
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I’m at a total loss. How can very smart lawmakers look at a letter from the IRS unequivocally calling a capital gains tax an income tax, see that every state revenue director in the country describes a capital gains tax as an income tax, realize that the nine states without a personal income tax don’t tax capital gains, and yet continue to insist a capital gains tax is an excise tax? Perhaps it’s because they are confused about the differences between a capital gains tax and a financial transaction tax.

There is not a single state in the country with an excise tax on capital gains. Why? As explained by the IRS:

“This is in response to your inquiry regarding the tax treatment of capital gains. You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such."

Some supporters of the proposed capital gains tax in Washington say it doesn’t apply to “earned income” and therefore isn’t an income tax. That is irrelevant. The income tax base consists of all forms of income: wage, salary, investments, etc.

The other argument made is that their proposed tax only applies to a transaction, a voluntary sale of an asset. If true, that would be an excise tax, a tax applied at point of sale on price or volume. That type of tax, however, is not a capital gains tax (a tax on income), it is more like a financial transaction tax. A financial transaction tax applies at point of sale based on the value of the asset.

As noted by the text of the bills proposing the capital gains tax, however, the tax isn’t applied at point of sale on price or volume but instead it is imposed on the "net long-term capital gain reportable for federal income tax purposes."

What determines the incidence of a tax is what it is applied to. An excise tax applies at point of sale on price or volume. An income tax, as explained by the IRS and every other state revenue department, is imposed on income. This fact is not in dispute anywhere else in the country. A capital gains tax is an income tax, full stop.

Additional Information
Testimony on HB 1496 (income tax on capital gains)