At the request of Representative Drew Stokesbary, WPC provided testimony this morning on the state income tax proposal, SB 5096. Advocates continue to try to hide the true nature of the tax by refusing to call it an income tax despite the IRS making crystal clear that capital gains taxes are income taxes,

The following is a transcriipt of the testimony WPC President Dann Mead Smith offered to the committee: 

Thank you madame chair and members of the committee, I’m Dann Mead Smith, President of  Washington Policy Center. Thank you for the opportunity to testify on Engrossed Substitute Senate Bill 5096.

We can tell you after having researched this topic for over a decade, there is not a single state in the country with an excise tax on capital gains. That’s because capital gains are not sold, they are the income from a sale. This is why the IRS and every state in the country make it clear that the capital gains tax is an income tax.  We have provided the committee members copies of that letter from the IRS as well as statements from all 50 states. And why citizens would now be required to file their IRS 1040 tax return with the state government.  This requirement would not be necessary if this were an excise tax as proponents claim. 

And this is also why the nine states, like Washington, without a state income tax do not tax capital gains. If enacted this would be the first stand-alone capital gains tax in the country and would add a new bureaucracy to Washington state government and cost all taxpayers, millions of dollars to administer. And as an income tax, it would strip Washington of its no-income tax advantage in attracting new businesses and would inevitably pave the way for broader income taxes to come.

Along with being constitutionally suspect, these type of taxes are extremely volatile and unpredictable. And this is why, the state of California actually amended its constitution to take capital gains revenue essentially off its balance sheet, and in the words of their former Governor Jerry Brown, they did this to separate state spending from this roller coaster of revenue volatility.

And here in Washington, with tax revenues growing substantially and federal aid in the billions coming in, this is also an unneeded tax.  And we know from experience that once in place the income tax would be expanded to more people.

For these reasons we would encourage you to reject ESSB 5096 and maintain what even our own state Department of Commerce has long called one of Washington’s competitive advantages, not having a personal income tax.

Thank you for your time and for holding this second hearing so we can share our research on why this bill will fundamentally and negatively impact small businesses, start-up companies and workers in our state.

You can get more information about the income tax proposal and find a link to sign our petition to Keep Washington Income Tax Free, here.