Governor Inslee signed SB 5061 into law this week to limit pandemic-related unemployment tax increases for Washington’s businesses. Also this week, the Senate passed a package of House bills to distribute $2.2 billion in federal COVID relief funds (HB 1368), to waive state business taxes on federal aid to businesses (HB 1095), and to help pay for Medicaid programs with money from the state’s “rainy day” fund to free up federal COVID funding for other needs (HB 1367.)

The bills passed the Senate by unanimous or near-unanimous votes and are now headed to the governor’s desk for his signature.

On Thursday, the House Finance Committee held a public hearing on HB 1496, to impose an income tax on the sale of capital assets by an individual. The bill would levy a 7% tax on Washington capital gains from the sale of long-term real estate assets and a 9.9% tax on the sale of  all other long-term assets.

If passed, the tax would take effect on January 1, 2022. Until 2025, 50% of  the proceeds from the tax would be directed to the state’s Fair Start for Kids Account to help pay for public child care and development programs. This would be a new account, to be created by HB 1213, which is currently still in the House Appropriations Committee.

After 2025, 60% of the money from the tax would be directed to that fund to account for the potential volatility of the revenues from the tax, according to the bill’s sponsor, Rep. Tana Senn (D-Mercer Island.)

Because dozens of people signed up online to speak on the bill, Committee Chair Rep. Noel Frame (D-Seattle) limited speakers to 90 seconds each and urged that proper decorum be observed and comments be limited to the bill before the committee.

The hearing proceeded in an orderly and courteous manner, and Rep. Frame allowed speakers to finish their testimony despite going over the time limit at times. However, when Seattle City Councilmember Sawant insisted on speaking off-topic about tax increases in Seattle, Rep. Frame turned off her microphone, after repeatedly asking her to address the bill before the committee.

Supporters of HB 1496 spoke mostly about the need to fund child care services. Opponents agreed that providing for child care and development services should be among the state’s priorities in the state’s new two-year spending plan that will be discussed later this session.

They pointed out, however,  that a tax on capital gains is an income tax prohibited under Washington’s constitution. Proponents claim it is an excise tax—a “tax on the privilege of selling capital assets.”

Washington Policy Center’s Jason Mercier has compiled extensive research on capital gains taxes over the past several years. He offered testimony documenting that the federal Internal Revenue Service and all 50 states define capital gains as income. He also pointed out that revenue from capital gains taxes are extremely volatile and unreliable, citing a 2014 California constitutional amendment that “separates state spending from the rollercoaster of [capital gains tax] revenue volatility.”

Joe Bishop-Henchman, Vice president of the National Taxpayers Union Foundation, made the same points in his committee testimony on the bill, saying that the tax would be extremely volatile and that it is an income tax—not a transaction tax.

Efforts to repeal the state constitutional prohibition against an income tax have failed at the polls ten times, most recently in 2010 when voters rejected a proposed ballot measure by 65%.

The bill, and a similar measure in the Senate, SB 5096, are not subject to Monday’s cut-off deadline for policy committee actions, because they relate to state budget matters.

WashingtonVotes.org is a free service provided by Washington Policy Center and is the go-to tracking tool to keep up with all the action in Olympia, especially during this mostly virtual session. Please check in often and follow us on Facebook and Twitter at #waleg.

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