SB 5096 would impose a 9% income tax on capital gains in Washington state

By JASON MERCIER  | 
Jan 13, 2021
LEGISLATIVE MEMO

Key Findings

1. There is no question SB 5096 would impose an income tax in Washington state. The Federal Internal Revenue Service (IRS) unequivocally says a capital gains tax is an income tax.

2. If enacted, SB 5096 would be the first stand-alone income tax on capital gains in the country.

3. No other state without a personal income tax has a capital gains tax, and those states that do tax capital gains income collect the tax through their state income tax code.

4. Officials in every state revenue department across the country agree that income taxes on capital gains are extremely volatile and unpredictable.

5. If enacted, the income tax on capital gains would certainly face legal challenges for being an unconstitutional tax on income.

6. Washington’s Department of Commerce has made the state’s lack of an income tax a major selling point for its “Choose Washington” campaign.

 

Introduction

Washington is currently one of nine states without a personal income tax. This includes no state tax on capital gains income. Senate Bill 5096, however, would impose a new 9% tax on certain capital gains income. The bill’s tax would apply to personal income defined as “Federal net long-term capital gain - the net long-term capital gain reportable for federal income tax purposes…”

Senate Bill 5096 was introduced for the 2021 Legislative Session would also require that “taxpayers owing tax under this chapter must file, on forms prescribed by the department, a return with the department on or before the date the taxpayer’s federal income tax return for the taxable year is required to be filed."

There is no question SB 5096 would impose an income tax in Washington state. The Federal Internal Revenue Service (IRS) unequivocally says a capital gains tax is an income tax. In a September 25, 2018 letter the IRS said:

"This is in response to your inquiry regarding the tax treatment of capital gains. 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.”

If enacted, SB 5096 would be the first stand-alone income tax on capital gains in the country. No other state without a personal income tax has a capital gains tax, and those states that do tax capital gains income collect the tax through their state income tax code.

Supporters say the tax proposed by SB 5096 is not an income tax; instead they call it an “excise tax.” It is arguably, however, an unconstitutional form of income tax that will be challenged in court...

Read the full Legislative Memo here.