Capital gains tax bill heads to House after passing Washington Senate

OLYMPIA – The state Senate passed a capital gains tax Saturday night, the only time since it was first floated six years ago that the controversial proposal has been up for a vote in the Senate.

After a more than four-hour debate, the bill passed 25-24 despite stiff opposition from Republicans who call it an unconstitutional income tax. Three Democrats also voted against it.

Passage in the Senate first is a huge step toward the proposal becoming law. In the past, House Democrats have said they had the votes to pass it but didn’t want to send it to the Senate, where it would almost certainly fail.

The proposal has changed significantly since it was first introduced. The version that passed Saturday would apply a 7% tax on the sale of stocks and bonds, personal property and businesses, but only if those profits exceed $250,000 annually. It would not apply to the sale of a home, commercial real estate, retirement accounts, livestock and other properties. The sale of a family-owned small business that makes less than $10 million a year would be exempt, as well as some real estate sales if the sale is also subject to a real estate excise tax, which passed the Legislature two years ago.

Bill sponsor Sen. June Robinson, D-Everett, said the tax is the first step in solving Washington’s regressive tax code where lower-income residents are paying a higher percentage of their income in taxes than high-income residents.

“It is not a panacea,” she said during the floor debate. “It is not going to get us there overnight, but it is an important step forward.”

About 9,000 tax returns across the state would be subject to the capital gains tax, according to the Department of Revenue. In Spokane County, that’s about 305 tax returns.

The state would begin receiving the tax revenue in 2023. It would bring the state about $550 million in revenue a year. About $350 million of that would go toward the state’s Education Legacy Trust Account to fund child care priorities included in a Democrat-sponsored Fair Start for Kids Act, which also passed the Senate on Saturday. The next $100 million would go into the general fund, with the remaining going into a newly created taxpayer fairness account.

One amendment passed Saturday removed an emergency clause on the bill, which would have put the bill in place immediately and removed the opportunity for citizens to file a referendum to repeal the tax. With the removal, citizens now have the opportunity to file a referendum to repeal the tax.

Democrats have tried to pass a capital gains tax for years but faced stiff opposition from Republicans and some moderate Democrats.

Opponents call it an unconstitutional income tax that will almost certainly be challenged in court. Sen. Lynda Wilson, lead Republican on the Ways and Means Committee, has said “every other state in the Union calls it an income tax.” Republicans also argued Saturday that this tax could lead to a broader income tax across the state.

In his speech on the floor, Sen. Mike Padden, R-Spokane Valley, pointed to previous Supreme Court cases striking down an income tax in Washington, as well as 10 ballot measures where voters struck down an income tax.

“Please stop asking the question,” Padden said. “The question is settled.”

Democrats, however, say the bill will hold up in court, just push off implementation of the bill, which they say could help make Washington’s tax structure more progressive and equitable, where lower-income residents aren’t paying a higher percentage of their income in taxes than high-income residents.

“Enough is enough,” Sen. Rebecca Saldaña, D-Seattle, said on the floor. “For many years, we’ve known our Washington tax code is upside down.”

Senate Minority Leader John Braun said Saturday the state can’t fix the tax system by collecting more money, regardless of who contributes it.

“What you have to do to make the system more fair is to reduce the tax burden on those at the bottom of the spectrum,” he said.

Sen. Jeff Holy, R-Cheney, said Eastern Washington hasn’t experienced the same economic growth that King County and Western Washington has. Spokane is just now experiencing some of the growth, he said, and many people don’t want this tax, as it might lead to businesses in the area leaving for Idaho or prevent new businesses from coming in.

“This is not King County,” he said. “This is not west of the Cascades.”

Along with opposing the proposal, Republicans criticized Democrats for bringing the proposal to the floor and filing amendments late, leaving little time for input.

Padden said this proposal is probably “the major piece of legislation for this entire session, and there should have been more time to work through the details in committee.”

“You want to make sure you get it right,” he said in speaking against the bill.

Robinson said she has incorporated input from Republican colleagues and opponents of the bill as she wrote and rewrote the bill.

Democrats have said all session that this is the year to pass a capital gains tax, to help make up for lost revenue due to the pandemic and to further invest in other programs, such as underfunded child care issues. Spokane Democrat Andy Billig told reporters two weeks ago that it isn’t realistic to say the state’s budget is balanced and then want to fund large programs, such as the Working Families Tax Credit or child care, without new revenue.

“The question is, do we want to do the bare minimum or is this the moment where we actually invest?” Billig said.

Wilson said Saturday that while Democrats want to use this tax to make longterm investments, it is “the most volatile tax,” which makes it difficult to fund longterm priorities.

Opponents of the bill say the state is likely looking at a revenue boost in the March 17 revenue forecast, which is what lawmakers will use to write the budget. The state will also likely get a large payout from the federal government if the $1.9 trillion stimulus bill passes Congress soon. Most of that money, however, will go toward one-time COVID-19 related costs.

“Why are we doing this now?” Wilson said on the floor. “Why are we choosing to create another tax on the taxpayers here in Washington?”

With half of the session left, a vote on a tax this early in the session is slightly unusual for the Legislature, which often votes on taxes and the final budget within the last few days of the session.

The capital gains tax bill now heads to the House of Representatives for further consideration, where it will likely have the support it needs to pass.

“Fifty percent of the legislative process is still to be continued as this goes to the other body,” Billig said on the floor. “We’ll keep working on the details.”