I-2109 will test voters’ acceptance of tax most of them don’t pay

Washington voters are being asked to settle – possibly once and for all – one of the most contentious and contested fiscal questions of the last decade: whether the state can levy a capital gains tax on some of its wealthiest residents.

The outcome of Initiative 2109, which would repeal the tax, may hinge on whether a majority of voters will reject a tax that less than two-tenths of 1% of them pay, or decide to keep it as a way to add money to education, child care and school construction.

Both sides have deep pockets and are expected to step up their pitch to voters over the next two months in an effort to be heard over the din of campaigns for president, governor, Congress and a handful of other ballot measures.

After years of study and arguing, the Legislature in 2021 approved a 7% tax on the gains over $250,000 per person from the sale of certain investments like stocks, bonds or some types of businesses, with exemptions for certain properties and retirement accounts.

Conservative groups, all legislative Republicans and a handful of moderate Democrats voted no. The vast majority of Democrats voted yes and mustered enough support in both chambers to send the bill to Gov. Jay Inslee.

Inslee – who has long supported such a plan as a way to help offset a state tax system that progressive groups say falls heaviest on lower-income groups – signed it.

Two conservative groups, the Freedom Foundation and the Opportunity for All Coalition, promptly sued, arguing this was really an unconstitutional income tax on a select group of residents. State attorneys argued it was an excise tax, which is constitutional.

Douglas County Superior Court Judge Brian Huber ruled it was an unconstitutional income tax, putting it on hold. The state Supreme Court disagreed, ruling 7-2 it was an excise tax, which is permitted under state law, not a property or income tax.

“One can own capital assets without ever owing the tax,” Justice Debra Stephens wrote.

Justice Sheryl Gordon McCloud disagreed, arguing that capital gains are considered income, and income is considered property.

But the strong majority in favor meant the state could proceed with collecting the tax.

By the end of 2023, the state had collected $895 million from a total of 3,354 taxpayer accounts. A breakdown by the state Department of Revenue shows the vast majority came from King County; with more than $748 million collected from 2,187 individuals or households, it is the home of the most payers. Spokane County was sixth on the list, with just under $9 million collected from 84 individuals or families.

The tax is due on April 15 – it’s tied to federal income tax reporting of capital gains – and another $443 million had been collected as of mid-May, although the local breakdowns aren’t yet available.

After the U.S. Supreme Court refused to take an appeal, opponents had one last avenue: the voters.

I-2109 was one of six initiatives to the Legislature filed last year by state Rep. Jim Walsh, the state GOP chairman, seeking to undo recently passed laws or prevent others from being enacted. Let’s Go Washington, a conservative organization led by hedge fund manager Brian Heywood, spent some $2.7 million gathering signatures for all six to be sent to this year’s Legislature.

Lawmakers passed three, involving parental rights in education, blocking an income tax and lifting some restrictions on police pursuits. But they refused a vote on the capital gains repeal, as well as a rollback of a cap-and-trade climate law and an ability to opt out of the state’s new long-term care insurance. Those three are up to voters.

The campaign over 2109 pits some major business interests against labor unions. Those seeking to convince voters to mark their ballots “Yes,” and thus rescind the tax, point to oft-repeated arguments by conservative groups that the tax opens the door for a general income tax. They also warn that the minimum amount of investment income covered by the tax could be lowered if the Legislature starts looking for more tax revenue, although the statute currently requires the threshold to be adjusted upwards based on the consumer price index.

Let’s Go Washington has raised about $5.4 million at last report that has been split among its multimeasure campaign, in large part from big donations from pro-business groups like the Building Industry Association of Washington and Main Street Matters to Washington. About half of that money was spent gathering signatures.

Liberal and progressive groups have continued their arguments that the tax on a small group of wealthy residents makes Washington’s overall tax fairer, and point to a fiscal impact that says repealing the tax would reduce expected state revenue over the next five years by $2.2 billion, much of which would be earmarked for K-12 schools, colleges and child care.

The No on I-2109 campaign has raised about $2.5 million at last report, with major contributions coming from the Washington Federation of State Employees, the Washington Education Association and the Service Employees Industry Union.

In a sense, I-2109 might provide a test for which of two long-held pillars of taxes in Washington politics is stronger.

One is the old political adage for making a new tax acceptable: Don’t tax you, don’t tax me, tax that guy behind the tree.

The other is Washington voters’ long-standing antipathy to anything that smacks of an income tax.

Supporters of the capital gains tax, who are thus opponents of I-2109, will be working hard to convince voters that the tree shielding nearly 5 million voters is an old-growth fir that they’ll never be behind.

Supporters of the initiative, who are opponents of the capital gains tax, will be working equally hard to convince voters that a capital gains tax is really just an income tax that will infest that tree and bring it down on top of everyone.