Is the proposed tax on capital gains an excise tax or an income tax?

Apr 13, 2017

Download file Download the full legislative memo here

Key Findings

1. A bill proposed by Democrats in the state House proposes to enact a capital gains tax in Washington.

2. If passed by the legislature and signed by the Governor, it would face an immediate court challenge.

3. The uniformity clause of the state constitution requires that property tax payers must be treated equally, and the courts have found that income is property.

4. Since a nonuniform tax on income is not allowed, supporters say a capital gains tax would be an excise tax, and thus allowed under the state constitution.

5. However, a survey of all 50 states conducted by Washington Policy Center finds that no state treats a capital gains tax as an excise tax.

6. The survey found that all states treat capital gains as income for tax purposes, and that the proposed capital gains tax is unconstitutional in Washington state.


A bill introduced by Democratic leaders in the state House, HB 2186, would impose a special state tax on the earnings that some people receive from capital investments.  The sponsors describe the bill as an excise tax, not an income tax.

The distinction is important because the uniformity clause of the state constitution bars the imposition of a property tax that treats citizens unequally.  The state supreme court has ruled repeatedly that income is property.  In addition, a state income tax is highly unpopular; Washington voters have rejected it nine times.

Any capital gains tax bill passed by the legislature and signed by Governor Inslee would face an immediate court challenge.  Whether it would survive a constitutional challenge hinges on how judges would interpret the tax.

So the important question arises: Is the proposed capital gains tax an excise tax or an income tax?

To answer that question I contacted the departments of revenue of all fifty states.  In every case, revenue officials reported that they consider a tax on the profits from capital investment to be an income tax.  In a few instances, state revenue officials actually chuckled at my question, because they thought the answer was obvious.

All state revenue departments describe capital gains as income.  Those that tax capital gains do so through their income tax codes.  No state taxes capital gains as an excise tax.  States without income taxes described their treatment of capital gains income similar to the way Florida officials did:

“There is currently no Florida income tax for individuals and, therefore, no Florida capital gains tax for individuals.”

The best response describing the difference between an excise tax and an income tax was provided by 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.”

Here are direct quotes from officials at each state revenue department describing how they treat capital gains income.  Quotes are from a survey I recently conducted of all 50 states.