Senate okays capital gains tax by 1 vote

A tax on capital gains, the sale of assets like stocks and bonds, passed the Senate by a single vote March 6.

The bill was first amended to remove the emergency clause, meaning the issue is likely to appear on the ballot later this year.

The bill in its current form imposes a 7% tax on the sale of assets, like stocks and bonds, when exceeding $250,000 in capital gains for a year.

Exempt from the tax is all real estate, assets held in a retirement account, livestock, timber and the sale of a family-owned small business that grosses less than $10 million a year.

The first $350 million of capital gains tax revenues each year are deposited into a state education account. The remainder is deposited into a new taxpayer relief account.

Sponsors have said the tax will raise $500 million a year, but detractors have said it is too volatile to rely on consistently.

There were several hours of passionate debate leading up to the bill’s passage.

Republicans argued the bill is an income tax in disguise, which is unconstitutional in Washington. Democrat proponents countered that it was an excise tax, also touting the necessity of making the tax system in Washington more equitable by having the highest earners pay a larger tax share.

Several Republicans said if Democrats want a fairer tax system, they should decrease taxes on those making less rather than increasing taxes on those making more.

The bill was eventually passed 25-24 after more than a dozen unsuccessful Republican amendments.

Four Democrat Senators broke rank and voted against the tax, causing the thin margin. Senators Tim Sheldon, D-Potlatch, Annette Cleveland, D-Vancouver, Steve Hobbs, D-Lake Stevens and Mark Mullet, D-Issaquah, voted no.

Sheldon said he views calling this an excise tax a “parsing of words.”

“The honest way, in my opinion, to propose an income tax is with a constitutional amendment. That would take a two-thirds vote of both houses of the Legislature, and then a majority vote of the citizens,” Sheldon said. “Moving this farther ahead takes us closer to a crisis of credibility of the Legislature. Are we listening?”

If the bill is signed into law, it is acknowledged by both sides it will almost certainly be challenged in court.

Democrats hope the bill is specific enough to be called an excise tax, or that the courts reverse the 1933 Washington Supreme Court ruling that labeled an income tax unconstitutional. Republicans hope the tax is seen as an income tax and unconstitutional.

If implemented, the first state capital gains tax returns are due in 2023.

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