HB 1730 and SB 5111, would impose a capital gains income tax in Washington state

By JASON MERCIER  | 
LEGISLATIVE MEMO
|
Feb 28, 2017

Key Findings

  1. House Bill 1730 and Senate Bill 5111 would impose a 7.9% tax on certain capital gains income.
  2. If enacted, this would be the first stand-alone capital gains income tax in the country.
  3. No other state without an income tax taxes capital gains, and those states that do tax this type of income collect it through their state income tax code.
  4. Supporters of House Bill 1730 and Senate Bill 5111 say the proposed tax is not on income; instead they call it an “excise tax for the privilege of selling or exchanging long-term capital assets.”
  5. It is arguably, however, an unconstitutional form of income tax that will be challenged in court.
  6. House Bill 1730 and Senate Bill 5111 supporters say a capital gains income tax is needed to provide a dependable funding source for education spending.
  7. The volatile history of capital gains income taxes in other states, however, shows this form of taxation does not provide a predictable revenue stream.

Introduction

Washington is currently one of nine states without a personal income tax. This includes no state tax on capital gains income. House Bill 1730 and Senate Bill 5111, however, would impose a new 7.9% tax on certain capital gains income.

If enacted, this would be the first stand-alone capital gains income tax in the country. No other state without an income tax taxes capital gains, and those states that do tax this type of income collect it through their state income tax code.

Supporters of these bills say the proposed tax is not on income; instead they call it an “excise tax for the privilege of selling or exchanging long-term capital assets.” It is arguably, however, an unconstitutional form of income tax that will be challenged in court.  This legal challenge could be used by proponents in attempt to overturn the state’s 84-year-old income tax ban that is based on past court decisions. 

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