Lawmakers told not to "call a pig a cow" on capital gains taxes

Apr 28, 2017

The Senate Ways and Means Committee held a four hour public hearing this past Wednesday on the House's $3 billion tax increase proposal. Although the Governor called the hearing a "waste of time," there were many thoughtful testimonies from the public on both sides of the debate. One of the more entertaining comments was from William Shadbolt of the Rental Housing Association of Washington. Addressing whether a capital gains tax is an "excise tax" or income tax, Mr. Shadbolt said: "You can call a pig a cow but it is still a pig." Considering how volatile a capital gains tax is, this pig doesn't even have lipstick on. 

Based on the bill report from the non-partisan legislative staff it looks like the reality from the rest of the country is starting to sink in for Washington that a capital gains tax is an income tax. From the bill report

"Under the federal tax code, individuals and corporations pay tax on the net total of all their capital gains just as they do on other sorts of income. The amount of federal CGT depends on both the tax bracket of the individual and the amount of time the capital asset was held before being sold. Short-term capital gains are taxed at the individual's ordinary income tax rate, and are defined as capital assets held for a year or less before being sold. Currently, long-term capital gains are generally taxed at a preferential rate in comparison to ordinary income for federal income tax purposes. In addition to the federal tax, capital gains are often subject to state income taxes. Most states do not have separate CGT rates. Instead, most states tax capital gains as ordinary income subject to the state's income tax rates."

There were a couple of questions during the hearing from lawmakers about how other states treat capital gains taxes. I recently contacted the department of revenue for every state asking this question and was told without exception that capital gains are treated as income and taxed via state income tax codes. Not a single state has a capital gains “excise tax” and no state without a personal income tax has a capital gains tax.

Why does it matter if a capital gains tax is an income tax? To enact a graduated income tax like the proposed capital gains tax would require a constitutional amendment. As noted by the Washington State Supreme Court (1951): "It is no longer subject to question in this court that income is property." The state constitution says that property must be taxed uniformly.

Seeing how the voters have already rejected five constitutional amendments to allow a graduated income tax, it is probably not a prudent course to tie approval of the budget to passage of a capital gains income tax constitutional amendment. 

Additional Information
State Revenue Departments Describe Capital Gains Income Taxes