Senate passes capital gains tax proposal

OLYMPIA — On a 25-24 mostly party-line vote, the Senate approved SB5096 on March 6, setting a 7% capital gains tax on profit realized from the sale of non-inventory assets such as stocks, bonds, mutual funds and even boats or artwork set to take effect in 2022 if it also clears the House and is signed by Gov. Jay Inslee.

Depending who you talk to, Saturday’s vote is either a historic move to create more fairness with the state’s tax code or the first steps towards destroying Washington’s business climate.

For those arguing the former during committee hearings, the bill would address the effects of institutional racism stemming from wealth concentrated among the very few, help fund development disabilities communities that were struggling even before the pandemic and create a fairer way for the state to pay its bills. Those arguing the latter the bill would drive businesses and business creators from the state, create an unnecessary burden on real estate and eventually lead to a state income tax.

“Most of the people in Washington don’t want a state income tax,” 6th District Sen. Jeff Holy (R-Cheney) said in a statement, noting voters have shot down several income tax ballot measures. “The Legislature should listen to the people and not try to impose one.” 

“This is a big moment in Washington State politics,” Northwest Progressive Institute founder and executive director Andrew Villeneuve said in a statement. “Washington’s upside down tax code has long been one of its greatest weaknesses. Today, the Senate took a hugely consequential step towards securing a more fiscally responsible, sustainable future for our state’s communities.”

According to the bill report, the first $250,000 of capital gains for individuals and couples are excluded from the tax, with certain specific assets also excluded and a deduction included for sales of “substantially all of a qualified family-owned small businesses.” The amount was reduced from 9% to 7% after testimony before the Senate Ways and Means Committee indicated the higher number would cut deeply into any realized gains.

The committee also replaced a sole proprietor deduction with a family-owned business deduction because of testimony. The bill exempts sales or exchanges of real estate from the tax as well as the value of goodwill received when a car dealership is sold and deposits the first $350 million in revenues collected each year into the Education Legacy Trust Account, with the remainder going into a new Taxpayer Relief Account.

Sales or exchanges of some capital assets excluded from the tax include all real estate, assets held in a retirement account, livestock related to farming or ranching and agricultural land that meets certain requirements. While the bill if adopted goes into effect Jan. 1, 2022, the first collections wouldn’t begin until April 2023, with annual revenues estimated at $500 million.

Staff for Senate Democrats said between 16,000 – 18,000 people in the state would be subject to the tax.

The bill’s passage comes at an interesting point in Washington’s budget season. A new revenue forecast is scheduled to be released March 17, and according to Opportunity Washington, the report’s already optimistic findings are expected to be revised upwards, based on recent collections data.

Opportunity Washington is a nonprofit public policy awareness partnership between the Association of Washington Business, Washington Roundtable and Washington Research Council founded in 2000. The group also notes $4.3 billion of the proposed $1.9 trillion federal COVID-19 stimulus bill is slated for state government, with another $2.4 billion head to governments around Washington.

“Our state’s revenue situation has improved since last year’s dip caused by the COVID-19 pandemic,” Holy said. “Our long-term state budget outlook is good, so we don’t need to create a state income tax. Passing a state income tax measure on a Saturday during a marginally transparent legislative session just sends the wrong message that the majority is trying to hide this from public view.” 

All Senate Republicans vote no along with three Democrats, Annette Cleveland of Vancouver, Steve Hobbs of Lake Stevens and Mark Mullet of Issaquah. The Senate did adopt several amendments to the bill including one that could send the measure to voters.

The House now takes up the bill.

John McCallum can be reached at [email protected].