Washington State passes its first Capital Gains tax

The home of America’s two wealthiest men now has its first capital gains tax. 

Gov. Jay Inslee signed into law Senate Bill 5096 on May 4 that taxes the asset revenues of up to 18,000 residents. The new law is effective January 2022. 

The law imposes a 7% tax on the sale of stocks, bonds and other high-end assets over $250,000 for both individuals and couples, and is expected to bring in $500 million in 2023 and upwards of a billion dollars from 2025-27. 

Retirement accounts, real estate, farms and forestry would be exempt from the proposed tax. Also, qualified taxpayers will be allowed to deduct up to $100,000 a year from their capital gains if they made more than $250,000 in charitable donations in the same tax year.

Washington state was deemed the “least equitable” tax system of any state by the Institute on Taxation and Economic Policy in a 2018 report. In light of this fact, Democrat lawmakers have focused on creating a tax system that would produce funds for K-12 schools and child care programs.

According to  one of the bill’s lead sponsors, Washington’s wealth inequality has led to rampant homelessness and less access to education and opportunities. 

“This is a way to invest in people, a way to invest in infrastructure and the needs we have in order to make people successful,” said Sen. Joe Nguyen.

Opponents to the new law challenged that the bill is unconstitutional based on the Washington Supreme Court decision against an income tax in 1933. The court’s decision determined that income, once received, became an asset, therefore the income tax was a property tax rather than an excise tax. 

Under the state constitution, property tax rates must be uniform across any type of property, so a graduated income tax was seen as a nonuniform property tax.

Former Attorney General Rob Mckenna has joined the second lawsuit against this tax on the grounds of its unconstitutionality. 

“Every taxing authority in the country, including the IRS and all other state revenue departments, agrees that capital gains are income,” the lawsuit reads. “Most states tax capital gains as ordinary income subject to the state’s income tax rates. Neither the federal government nor any other state levies an excise tax on capital gains.”

Yet, proponents of the bill suggest that the measure is a tax on the sale or exchange of assets such as stock and bonds. If the owner doesn’t choose to sell their assets then they will not be taxed on this exchange, therefore classifying it as an excise tax rather than a property tax.