Washington House passes capital gains tax, the furthest such a proposal has ever gotten in the state

OLYMPIA – The state House of Representatives passed a capital gains tax bill Wednesday, the closest the Democrats’ proposal has come to final passage since it was first introduced at least six years ago, but it could still face challenges in the Senate.

The bill passed 52-46 after a nearly five-hour debate late Tuesday and a two-hour debate Wednesday. Five Democrats joined Republicans in voting against it. It now heads back to the Senate.

The current version of the proposal would impose a 7% tax on the sale of long-term assets, such as stocks, bonds, personal property and businesses, if the profits exceed $250,000 annually. Some exceptions include the sale of a home, commercial real estate and livestock. The sale of a family-owned small business, owned for at least five years, that makes less than $10 million a year also would be exempt.

Rep. Noel Frame, D-Seattle, said the bill is the key to tax reform in the state, which she and supporters say has one of the most regressive systems of taxation in the country - one in which lower-income residents pay a higher percentage of their income in taxes than high-income residents.

“We must rebalance the tax code for Washington’s working people,” Frame said on the floor Wednesday.

Democrats and Gov. Jay Inslee have called for a capital gains tax for years but could never get it through both chambers, facing stiff opposition from Republicans and some moderate Democrats. This is the furthest the bill has ever made it.

Opponents have long argued it is an unconstitutional income tax that will almost certainly be challenged in court. Supporters have said they believe it will hold up in court, but it could push off implementation of the bill.

The state constitution prohibits a graduated tax on income. The Supreme Court has struck it down before, even after voters agreed to one during the Great Depression in 1932.

If a capital gains tax is signed and holds up in court, opponents also say it would open the door for implementing a statewide income tax, which has been shot down by voters 10 times .

Rep. Jesse Young, R-Gig Harbor, said if the bill passes, he’s worried it would be expanded to include more people.

Opponents also call the tax a particularly volatile one that is difficult to rely on for longterm funding. Rep. Drew Stokesbary, R-Auburn, called it “the most volatile tax that any state anywhere collects.”

One of the biggest changes the House made to the bill is adding a line to make the tax “necessary for the support of the state government and its existing public institutions,” which could prevent voters from bringing a referendum on the bill to the ballot.

Any revenue that goes toward funding fundamental governmental operations, in this case child care and education, is exempt from a referendum, House Speaker Laurie Jinkins, D-Tacoma, told reporters Tuesday. The language is in the bill to signal to the secretary of state that this tax is necessary for government and, therefore, possibly exempt from a challenge by referendum.

It’s unclear how the Senate will feel about that additional language, but Senate Majority Leader Andy Billig, D-Spokane, told reporters Wednesday the funds from the tax are “absolutely necessary” to pay for advancements in child care.

A previous version of the bill had an emergency clause, which would have put the tax into effect immediately and taken away the ability for voters to bring a referendum on it. Opponents say the new language that makes it “necessary for the support of the state government” has the same effect as an emergency clause.

Republicans argued that voters should have a say in whether the tax is enacted. If the governor signs the bill, the tax would go into effect 90 days after session, but the state wouldn’t get revenue from it until 2023.

Because of the delayed implementation, Rep. Ed Orcutt, R-Kalama, said voters should have a say in the tax.

“It is not an emergency,” he said. “It doesn’t need to go into effect immediately because the money doesn’t come in for two years.”

Republicans introduced multiple amendments to remove that line, but all of them failed.

The fiscal analysis of the bill indicates about 7,000 taxpayers would have to pay the tax, likely less than 1% of taxpayers. It would bring in about $550 million a year for the state . Most would be deposited into an account that pays for education, child care and early learning. Democrats have said the money will go to fund child care.

House and Senate Democrats have written the capital gains tax into their proposed budgets. A final budget negotiated among House and Senate Democrats is set to be released later this week.

Republicans have said there is no need for additional taxes when there is so much federal COVID-19 stimulus money coming into the state.

Rep. Joe Schmick, R-Colfax, said the state has “never been in a better financial position.”

The bill now heads back to the Senate for final concurrence on amendments added by the House. The capital gains tax, along with the final two-year budget and a handful of other big proposals, need to pass the Legislature by the end of the session, scheduled for Sunday.