Paul Guppy: Initiative 2019 repealing excise tax would boost Washington revenues

By Paul Guppy

Washington voters will soon have an opportunity to repeal our state’s first income tax, but the question won’t be framed that way on the ballot. Income tax proposals have been defeated by voters 10 times, most recently in 2010, when Washingtonians rejected an “income tax on the rich” by a crushing 64%. Previous proposals, however, didn’t have the advantage of the political camouflage afforded by the ability to deny the issue at stake is income taxes.

Thanks to creative maneuvering by lawmakers, the income tax on capital gains was labeled an “excise tax.” Excise taxes are taxes on transactions. A capital gains tax, as the name implies, is a tax on a gain – the income from the transaction. That is why the IRS recognizes capital gains taxes as income taxes and when specifically asked whether a capital gains tax is an excise tax or an income tax the IRS affirmed “it is an income tax.” The revenue departments of all 49 other states and even revenue departments of other countries all treat capital gains taxes as income taxes. Those calculating what they owe under Washington state’s capital gains tax have to use their federal income tax forms to figure out what they owe.

Despite all this, our state Supreme Court discarded precedent and common sense to rule in favor of the façade and determined that in Washington state, unlike anywhere else in the world, an income tax on capital gains is really an excise tax and therefore constitutional. So in Washington, we don’t call the income tax on capital gains an “income tax” but that’s what it is. To paraphrase Shakespeare: An income tax by any other name still stinks.

While advocates claim the tax of 7% on capital gains income over $250,000 is aimed at “the rich,” in 2023 the Legislature considered a proposal that would eliminate the $250,000 exemption.

The state will not “lose” money if voters pass Initiative 2109 and repeal the tax. General fund revenue is now $72 billion per budget. State tax revenue has doubled in the past 10 years, while inflation went up only 34%. It will continue to increase by billions of dollars every year under current taxes without the capital gains income tax.

Opponents threaten Initiative 2109 will “cut child care” and make the “school funding crisis” worse. Neither statement is true. School funding is at $29 billion with public schools spending over $19,000 per student and state social spending is at record levels and rising.

Opponents also say passing Initiative 2109 would shift “tax pressure to small businesses and working families, impacting Washington’s economy.”

This assertion is false. Initiative 2109 would only cut taxes, not increase taxes on anyone. Taxes could go up only if lawmakers respond to voter approval of Initiative 2109 by increasing other taxes.

Shortly after the Legislature passed the excise tax, Fisher Investments, a firm with 1,800 employees and $197 million in assets, moved out of state. Similarly, in October billionaire Jeff Bezos relocated from Seattle to Florida, a state with no income tax. Financial analysts estimate the move saved him $600 million in capital gains income tax.

The loss of jobs and investment available to grow Washington’s economy is not surprising. Until recently, the Inslee administration bragged to business owners that Washington state did not have an income tax, recognizing that this policy made our business climate more attractive. Now, the Inslee administration has deleted the claim from the Department of Commerce’s business-recruiting web page. The result is that the state is losing jobs and business that might otherwise come here.

Known for cutting-edge innovation for over a century, Washington is losing its once-vaunted reputation as an exciting and bustling West Coast business center that attracts the best and brightest from around the world. By pushing policies like taxing successful capital investments state leaders now signal that Washington is a place to avoid for entrepreneurs seeking to relocate an existing business or start the next great company.

But at least one fix is easy. Thanks to I-2109, the income tax repeal is on the ballot. The question is, will voters be able to see it for what it is?

Paul Guppy is a senior researcher for the Washington Policy Center. Members of the Cowles family, owners of The Spokesman-Review, have previously hosted fundraisers for the Washington Policy Center and sit on the organization’s board.