Governor proposes 9% capital gains income tax

By JASON MERCIER  | 
Dec 13, 2018
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Despite substantial state revenue growth, Governor Inslee today is proposing a 9% capital gains income tax. This is just one of several tax increases the Governor is proposing. The state Department of Commerce has repeatedly said the lack of an income tax is a "competitive advantage" and "is great marketing" for Washington.

There is no debate on this point – a capital gains tax is an income tax. This according to the IRS, every state revenue department in the country, and just plain common sense.

IRS 9/25/18 capital gains income tax letter 
“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."

State Revenue Departments Describe Capital Gains Income Taxes
All state revenue departments describe capital gains as income. Those that tax capital gains do so via their income tax codes. No state taxes capital gains as an excise tax. States without income taxes described their treatment of capital gains income like Florida did: "There is currently no Florida income tax for individuals and, therefore, no Florida capital gains tax for individuals." The best response differentiating between what an excise tax is versus income tax was Illinois: "Capital gains are included in federal taxable income, against which Illinois income tax is determined. Illinois does not impose an excise tax on any form of income. Excise taxes are imposed on items of consumption, such as the liquor tax, cigarette tax and utilities taxes."

Make no mistake, if adopted this capital gains income tax will result in a lawsuit. If the Governor and others really believe this is not an income tax this language should be included in the proposal:

"New Section: The legislature recognizes well-established state supreme court precedent declaring income to be property. In adopting this excise tax on capital gains, the legislature does not believe this tax to be on income. If the capital gains tax is challenged in court, the state Attorney General is prohibited from asking the court to reconsider its prior rulings declaring income to be property and must defend the tax solely on the basis it is an excise tax and not an income tax."

The courts have repeatedly made clear you can’t call an income tax an “excise tax” to avoid the state’s graduated income tax ban. Former state supreme court Justice Talmadge highlighted this fact from the decision in the case Jensen v. Henneford:

“The Legislature attempted to describe the income tax as an excise tax on the ‘privilege of receiving income’ in the State of Washington. The Supreme Court was unmoved. “The Jensen court stated that the 1935 Legislature’s effort to rename the tax did not make it an excise tax . . . Subsequently, in Power, Inc v. Huntley, the Legislature enacted what it described as a corporate excise tax, which was actually a graduated new income tax on corporations. Again, the Supreme Court indicated that legislative labels for a tax are not controlling.”

On the one hand, you have the IRS and every state revenue department in the country saying a capital gains tax is an income tax. On the other hand, you have those who are trying to evade WA's prohibition on graduated income taxes. Who are you going to believe?

Additional Information
IRS letter to Rep. Newhouse on capital gains taxes 
WA Department of Commerce: No state income tax "is great marketing" for Washington
Washington officials say no state income tax is competitive advantage
State Revenue Departments Describe Capital Gains Income Taxes
Lawmakers again propose capital gains income tax
New poll shows strong opposition to income tax in any form