Lawmakers are smart people working to adopt fact-based policy, yet several continue to say they want to close the “loophole” on capital gains taxes. I’ve searched and searched the state RCWs trying to find that “loophole,” but I’ve failed. I was, however, able to find 10 straight rejections by the people of income tax ballot measures (including 6 proposed constitutional amendments) and state supreme court rulings prohibiting a graduated income tax. In fact, one short unanimous ruling from 1960 told lawmakers they needed to amend the state constitution if they want to impose an income tax.

Lawmakers continuing to insist that a tax on capital gains isn’t an income tax must know something I don’t. I personally contacted the revenue director for every state and was told the same thing: Those that tax capital gains do so via their income tax codes and those without capital gains taxes don’t tax personal income. I’ve researched how the IRS classifies a capital gains tax and learned: “It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

I reviewed the non-partisan legislative staff bill report and saw: “In addition to the federal tax, 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.”

I went line-by-line through the text of the bill and discovered it defined that taxable capital gain as the revenue 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.

With some claiming a capital gains tax is just like the state’s Real Estate Excise Tax (REET), I researched the differences between those taxes and discovered that argument just helps further illustrate why a capital gains tax is in fact an income tax.

We want to have honest fact-based conversations when considering changes to the state’s stable tax structure. Numerous tax authorities clearly say a capital gains tax is an income tax, yet some continue to claim it is an “excise tax.” I must be missing something. Please fact check these details and help me understand.

Additional Information
A Capital Gains Tax IS an Income Tax: Irrefutable Proof in About Two Minutes
BAD POLICY: An Income Tax on Capital Gains for Washington