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The Impact – Capital Gains & Wealth Tax Debate

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February 10, 2021

Does state government need more money to meet the needs exacerbated by the pandemic and if so, should lawmakers overhaul the tax base while they’re at it? Those are some of the big questions facing lawmakers this year. Currently the state tax base relies heavily on sales, property, and business taxes. Democratic Governor Jay Inslee proposed a 9% capital gains tax as one of the revenue options to fund his legislative agenda. Democrats in the House and Senate have introduced three different versions of the capital gains tax bill with different rates and different funding priorities.

1) Senate Bill 5096 sponsored by Democratic Senator June Robinson would create a 9% tax on annual investment earnings over $25,000 for individuals filing single returns or over $50,000 dollars if filing jointly. The Washington State Department of Revenue estimates the tax would affect about 58,000 taxpayers in year one, 2022. The bill contains various exemptions including home sales, retirement accounts, livestock, timber, and certain business assets and equipment. SB 5096 has an emergency clause so it would take effect immediately eliminating the option for a public referendum to repeal it. (Preliminary Financial Analysis)

2) Senate Bill 5204 sponsored by Democratic Senator Bob Hasegawa would create an 8.5% capital gains tax on the sale or exchange of long term capital assets to help fund a Universal Essential Health Benefits Trust. The bill also includes various exemptions including home sales, retirement plans, timber, livestock and business equipment.

3) House Bill 1496 introduced by Democratic Representative Tana Senn would create a 7.7% capital gains tax on real estate sales and a 9.9% tax on the sale of stocks, bonds, and other assets for earnings greater than $200,000 per person. Senn has proposed using the revenue to for child care assistance. The bill contains similar exemptions for home sales, retirement accounts, agricultural or timber property and business equipment.

Twenty-six democratic state representatives and twelve state senators have signed on to a bill that would make Washington the first state to impose a wealth tax.

~ House Bill 1406 would target the worldwide wealth of Washington most well to do residents. At an annual rate of 1% of worldwide taxable wealth, the bill would cover cash, cash equivalents, stocks, bonds, commodities contracts, pension funds and other intangible financial assets. Democratic House Finance Committee Chair Noel Frame is the prime sponsor. A companion bill in the Senate is sponsored by Sen. Sam Hunt (D-Olympia).

Representative Frame argues that Washington’s tax code is too regressive in that the least wealthy residents pay a greater share of their income in taxes than the very rich. “Should we finally join forty other states in having a broad exemption for one’s primary home?” said Rep. Noel Frame, (D-Seattle). “When we think about what are the primary wealth building tools of the middle class versus the primary wealth building tools of the ultra-wealthy, real property, particularly one’s home, tends to be the primary wealth building tool of the middle class and we tax that asset when you own it and we tax it when you sell it. Whereas with intangible financial property we tax it 0% when you own it and 0% when you sell it.”

The highest ranking republican member of the House Finance Committee is highly skeptical of the wealth tax proposal.

“Constitutionality. Collectability. If you were going to be taxed a billion dollars, would you stay in this state or would you move to another state?,” said Rep. Ed Orcutt, (R- Kalama), Ranking Member, House Finance Committee. “The people that are, that have this kind of wealth, they have the ability to move somewhere else. They didn’t get wealthy without knowing how to take advantage of tax codes and to get the maximum benefit out of whatever the tax code is. They will look at different states to figure.”

“I just firmly reject the assertion that people would automatically move if we put better, progressive tax tools in the toolbox to make the tax code more progressive,” said Frame.

The capital gains tax bills are promoted as only targeting those who can afford to pay more, but the actual tax burden remains a point of debate.

“Most middle class families are not subject to capital gains tax now, nor would they be subject to capital gains tax under the Washington state law,” said Frame.

“I hear from a lot of employers in my district that are concerned that eventually this is going to apply to them,” said Orcutt. “They talk about what happens if they built a business from ground zero. They build it up and they try to pass it off onto someone else, what are the effects of any of these taxes going to be on their business and their ability to operate? Who’s the next investor that’s not going to come here if we put some of these taxes out there?”

“You know we know that there is an extraordinarily weak relationship between tax policy and economic competitiveness. It’s not about tax policy. It’s about the amenities we have. It’s about the low poverty rate. It’s about the good schools. It’s about the good roads. Washington state is winning in economic competitiveness,” said Frame.

Orcutt takes a very different view of the state’s budget situation.

“”We’ve got to remember one thing. It’s going to be harder to keep, keep up with any, any tax system if we’re seeing expenditures at the rate they are increasing. Since Governor Inslee’s been in office we’ve seen our budgets increase by eighty-four percent. Eighty-four percent increase. Who has seen that kind of increase in their revenues?” said Orcutt. “Most people in their businesses have never seen that kind of increase. And most people in their homes, in their personal and their family budgets have never seen that kind of increase either, so we’ve got to do something about the spending rather than just look for more ways to tax more people.”

Representative Frame said part of the growth in state budgets is related to the landmark McCleary ruling under which the state was legally obligated to invest much more in public education, but timing was also a factor.

“When you draw the line and start from the bottom of a recession of course that line is going to increase and I think as we are in the current economic recession we are reflecting a lot on what we did the last time,” said Frame. “You know, other economies around us, they recovered a lot faster because they invested in their people at the exact time that they needed that support. We did not.”

“We just got a $2.2 billion package off the House floor again largely with federal dollars. As we move forward, if we hadn’t had those federal dollars the tools that we would have had would been very restrictive and would have asked literally the lowest income households to disproportionately foot the bill for economic recovery,” said Frame. “So in this moment it feels like asking those currently not sharing equitably in the responsibility of funding government programs and investments to contribute in a more equitable way to economic recovery feels like the right conversation to be having right now.”

“I’ve got really, really, big concerns about any of these tax proposals on the rich. And if we’re worried that the people on the lower end of the spectrum are carrying too big of a burden, let’s lighten the burden. I’ve got a bill (HB) 1358 which would lower property taxes,” said Orcutt.

“The McCleary decision, that’s raised way more money in property taxes than I think any of us expected and so my bill would actually lower property taxes which, if that’s regressive, then the biggest benefit would be to the lower income. So that’s just one way that we could go about doing it,” said Orcutt. “I think when you’re in any kind of a downturn instead of looking to take more money out of the economy you should be looking to stimulate the economy and adding taxes doesn’t do that.”

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