Lawmaker’s emails confirm goal for capital gains proposal is broad income tax

Mar 26, 2020

We’ve been warning for years that the real plan behind the capital gains income tax proposals in the state legislature was to set up a lawsuit in hopes of imposing a graduated income tax without a constitutional amendment. Thanks to recent legislative public records, you don’t have to take our word for it anymore. Consider the following 2018 email from Sen. Jamie Pedersen (page 1 of pdf):

“But the more important benefit of passing a capital gains tax is on the legal side, from my perspective. The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.”

This was just one of 4,000 pages of capital gains income tax public records I recently received from the Legislature. Many more are still to come according to legislative public records officers. Here are some of the other interesting pull quotes from the public records I received to date:

  • Sen. David Frockt 2012 email to undisclosed list (page 20 of pdf):  “I wanted to share with you the comments from Phil Talmadge. I asked him to take a look at Hugh Spitzer's analysis on the potential constitutionality of the capital gains tax proposal which I have also attached. As you can see, he was not impressed.

    I recognize that the various groups are unhappy with him for his role in arguing that I-1098 was likely unconstitutional. However, I have worked with him on numerous occasions since he left the bench on appellate matters and have always found his analysis spot on. He also wrote the dissent in the Harbour Village case, which he mentions below, which was the last major case where the Court had the opportunity to evaluate whether income was still property. I think he has a pretty good read on this issue.

    I want to be clear, I am willing to consider the capital gains tax proposal - but I think we need to be absolutely clear that there is no guarantee this thing will be upheld as valid under our constitution for two reasons. One - I have yet to quite understand how a tax calculated on income reported on a schedule to your federal 1040 form is going to pass the smell test of being a tax on the transaction underlying the sale of the asset. Yet, that is the foundation of Hugh's analysis. I think that is what Phil is getting at. Second, I think if it is held as income - the five percent rate takes it well above the uniformity clause rate of one percent and thus makes it vulnerable on that ground as well as on the ground that the $10,000 exclusion is not valid because it create two separate classes of taxpayers. We should probably really talk deeply with our tax experts on staff about their take.”
  • 2011 email from former state Supreme Court Justice Phil Talmadge to Sen. Frockt (page 21 of pdf): “My short response is that Hugh is dreaming. He’s something of a one-man band on this issue. He keeps thinking the Court will retreat from its view that income is property. The Court had a chance to do so a few years ago in Harbour Village, a case involving an assessment on apartments in Mukilteo. Hugh cites this case deep in a footnote in the last page of his memo. It declined to do so. With Wiggins and Gonzalez’s addition to the Court there might be more interest on the Court in changing the law, but the political fall out for any of the justices going that way will be immense. It opens the door to the income tax and you and I both know how little the voters want that, as Bill Gates, Sr. learned.”
  • 2015 email between staff and Democratic lawmakers (page 16 of pdf): “Saying a capital gains tax is stable is probably stretching credulity.”
  • 2014 staff email to Sen. Frockt (page 19 of pdf): “The revenue folks called to reiterate the volatility of the tax.”
  • Summary of phone call between lawmakers Joe Fizgibbon, David Frockt, Laurie Jinkins, Kris Lytton, Cindy Ryu and Sharon Wylie (page 12 of pdf):
    • “Very preliminary legal analysis by structuring this as an excise tax – as a flat tax, we can legally classify it as an excise tax and not an income tax – so we can avoid an income tax in our state – Supreme Court would have to rule on whether this is an appropriate excise tax.   
    • David – why would it be an excise tax? There are states that have capital gains taxes but all the ones that had no income tax had no capital gains tax.   
    • David – how would you do this? Every other state that taxes this does it through their personal income taxes?”

As a reminder, addressing directly what type of tax a capital gains tax is the IRS said:

“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."

The lack of an income tax has long been advertised by the State Department of Commerce as being a “competitive advantage” for Washington. State Treasurer Davidson has also repeatedly stated why not having an income tax is positive for Washington. Washington voters have also rejected 10 straight income tax proposals and a recent poll shows 72% are opposed to a local income tax.

Thanks to these just released legislative public records, there can no longer be any debate that the real goal of the capital gains income tax proposals is to set up a lawsuit in hopes of being able “to enact a progressive income tax with a simple majority vote.”

Updated 3/30 at 4:40 p.m. 

I received more public records today (still more to come).

Here are a few of the new interesting ones. Pull quotes:

  • "Attached are some charts on capital gain tax compared to the retail sales tax (growth rates and total amounts.) Capital gains are more volatile."
  • "The criteria of whether it is capital gains is the federal line 13 of his federal income taxes would be the specific category. Thus, if his business income generated is subject to federal capital gains tax then it would be subject to Washington's new capital gains tax as well."

Additional Information
Public records reveal WA DOR’s thoughts on capital gains income taxes
Lawmakers ask state Supreme Court to overturn prior rulings, allow income tax
Senator Nguyen: “I agree with you that cap gains is income”
Income tax advocates reminded how to properly amend state constitution
State tax officials across country agree – capital gains income taxes are extremely volatile and unpredictable
Tax Foundation: Income Taxes Are More Volatile Than Sales Taxes During an Economic Contraction

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