House Democrats propose state income tax on capital gains
Despite record revenue growth, House Democrats want to impose even higher taxes on Washingtonians, starting with a state income tax on capital gains. This income tax plan follows the poor example of Seattle by willfully setting up a lawsuit in hopes the courts will reverse course and allow an income tax. This is not a debate – a capital gains tax IS an income tax.
Here are the undisputed facts about income taxes on capital gains:
- Internal Revenue Service (IRS): “You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax."
- States without income taxes don’t tax capital gains income.
- Washington’s non-partisan legislative staff: “…capital gains are often subject to state income taxes. Most states do not have separate capital gains tax rates. Instead, most states tax capital gains as ordinary income subject to the state's income tax rates.”
- The actual text of capital gains tax bills in Washington defines the taxable capital gain as the income reported “for federal income tax purposes” and that those subject to the tax would be required to submit to the state a copy of their federal income tax return.
- Income taxes on capital gains are not a reliable revenue source. From WA’s Department of Revenue: “Capital gains are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented here.”
Lawmakers can’t claim ignorance of these facts. I shared all of these details with the House Finance Committee during a January 24, 2019 work session on the state’s tax structure. I also provided every lawmaker with a copy of the IRS letter that defines a tax on capital gains as an income tax.
This is not the first time this year some lawmakers have hoped the courts would bypass the people and impose an income tax. Earlier this year several Democratic lawmakers filed an amicus brief in the Seattle income tax case asking the court to overturn nearly a century of case law prohibiting a graduated income tax without a constitutional amendment.
The courts should not be used to circumvent the people on income taxes. As state Supreme Court Justices told lawmakers in an unanimous 1960 ruling, they needed to first ask voters to amend the state constitution if they want to impose an income tax.
It is incredibly disappointing to see the House attempt to willfully set up an income tax lawsuit with its budget proposal. Should the Senate follow this unfortunate path, uncertainty will surround the 2019-21 budget while taxpayers are forced to defend their constitutional rights with a lawsuit to invalidate the income tax on capital gains.
A Capital Gains Tax IS an Income Tax: Irrefutable Proof in About Two Minutes
BAD POLICY: An Income Tax on Capital Gains for Washington
Washington Capital Gains Proposal Not Helped by Analogy to Real Estate Excise Tax