Who calls a capital gains tax an income tax? Every tax authority in the country

By JASON MERCIER  | 
Jan 20, 2019
BLOG

Trust me, I’m as tired talking about why a capital gains tax is an income tax as you are hearing about it but for some reason this indisputable fact continues to be questioned by some in Washington. I have spent the last few years searching for any tax authority that calls a capital gains tax an “excise tax.” I have found none because there are none. Instead, every tax authority in the country calls a tax on capital gains an income tax.

Consider the following descriptions of taxes on capital gains income:

  • Urban-Brookings Tax Policy Center: “Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate.”
     
  • Center on Budget and Policy Priorities: “Under current state and federal law, these capital gains are reported and taxed as income in the year that they are realized.”
     
  • Tax Foundation: “At the federal level, short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at a lower rate . . . consider the difference in how income and excise taxes function, since proponents of a Washington capital gains tax want to call this an excise tax on the privilege of earning capital gains. Excise taxes fall on specific transactions… [Taxes on capital gains are] not levied at a set rate on each financial transaction. Rather, they’re imposed on the net income from investments when that income is realized. There’s no getting around that this is an income tax—just a very narrow one.”
     
  • Internal Revenue Service: “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."
     
  • Nonpartisan bill report for SB 5129 (capital gains tax): “Under the federal tax code, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. For individuals, 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 . . . 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.”

This is why every state in the country with a capital gains tax calls it an income tax, and those states without income taxes don’t tax capital gains.

If capital gains tax supporters in Washington continue to insist their tax proposal is an “excise tax” and not an income tax, they need to include this language in their bill:

"New Section: The legislature recognizes well-established state supreme court precedent declaring income to be property. In adopting this excise tax on capital gains, the legislature does not believe this tax to be on income. If the capital gains tax is challenged in court, the state Attorney General is prohibited from asking the court to reconsider its prior rulings declaring income to be property and must defend the tax solely on the basis it is an excise tax and not an income tax."

Refusing to include this language will make it clear their true motivation is to set up a lawsuit in hopes the state Supreme Court will strike nearly a century of caselaw prohibiting a graduated income tax.