Gov. Jay Inslee last week proposed an income tax.
He’s not calling it an income tax. Instead, he refers to it as a capital gains tax.
That’s a tax on income — just ask the U.S. Internal Revenue Service.
The U.S. government considers money gained through the sale of a capital asset — such as stocks and bonds — as income. Thus, the IRS sees it as taxable and expects it to be included in your yearly tax return.
Inslee’s budget plan released Thursday calls for a 9% tax on capital gains earnings above $25,000 for individuals or $50,000 for joint filers.
A cash infusion might well be needed to fill the huge hole in the state budget created as the pandemic has reduced sales tax collections substantially. Revenue projections (tax collections) are $2.4 billion below pre-pandemic estimates.
Still, that’s not a legitimate reason to impose an income tax. It is simply not allowed under the state constitution. The state Supreme Court has ruled in the past that income tax is illegal in Washington.
And the voters of the state have rejected the concept 10 times, including efforts to change the state constitution. Income tax has been considered the third-rail of state politics since the 1960s.
This is why Inslee and others who are open to an income tax are careful to specifically use the term captain gains. It provides better political optics.
We believe this proposal, like previous efforts to impose an income tax in Washington state, should be quickly rejected by the Legislature.
But we also understand, given the political makeup of the Legislature in which both houses are controlled by Democrats, that won’t happen when lawmakers gather (either in person or remotely) in January.
A capital gains tax will certainly be introduced and debated. It might even get some traction.
In the end, however, getting enough support in the House and Senate will be extremely difficult.
But even if it were to occur, we expect the tax to be challenged in court and the state’s Supreme Court would again reject it.
The only way to impose an income tax (including taxing capital gains specifically) is to change the state constitution.
The threshold to change the state constitution is, as it should be, significantly higher than approving a law. It requires a two-thirds majority of both houses of the Legislature as well as approval by a vote of the people.
If the governor wants to impose a capital gains tax that’s the only viable route.