Democratic State Senate Sends Capital Gains Tax to House

by Leo Brine

(This article originally appeared on PubliCola and has been reprinted under an agreement.)

For the first time in Washington state history, state legislators had a floor vote on a long-proposed capital gains tax. Even more novel: They passed it.

On Saturday, March 6, the Senate Democrats, led by Sen. June Robinson (D-38, Everett) pushed SB 5096 through the senate. The bill passed 25 to 24 with most of the Democratic majority, including all of Seattle's delegation, voting for it. The entire Republican caucus, along with moderate Democratic Senators Steve Hobbs (D-44, Lake Stevens), Mark Mullet (D-5, Issaquah), Annette Cleveland (D-49, Vancouver), and Tim Sheldon (D-35, Potlatch), voted against the bill. A capital gains tax has been part of Governor Jay Inslee's biennial budget proposals since 2014 and has appeared in every biennial budget proposal since.

The bill proposes a 7% tax on capital gains—profits from the sale of stocks, bonds and other long-term assets—over $250,000; the Washington State Department of Revenue estimates that fewer than 20,000 people statewide will be subject to the tax. The bill would take effect in 2022 and an amendment adopted Saturday requires the threshold amount to be adjusted for inflation annually.

The tax excludes capital gains from the sale of real estate, farming and ranching livestock, certain agricultural land sales, timber and timberlands and retirement accounts.

After debating 19 amendments, the senate adopted three, including one that irks progressives; the amendment, inserted in the biill by centrist Sen. Steve Hobbs, struck down the emergency clause that would have protected the bill against a voter referendum.

The other two amendments were proposed by bill sponsor Robinson and another by Sen. Marko Liias (D-21, Lynnwood), respectively

Robinson's amendment directs the first $350 million collected per fiscal year from to the tax to go into the state's Education Legacy Trust account with the following $100 million going into the state's general fund. Any more collected would go into a "Taxpayer Relief Account," which will fund tax breaks for low-income Washingtonians.

Democrats are using the revenue from the capital gains tax to fund another bill the Democratic senate recently passed, a child care bill aimed at expanding affordable child care and early childhood development programs in the state. Democrats say the pandemic has illuminated and exacerbated the issue of unaffordable child care.

That's certainly good scripting from the Democrats, especially if the legislation goes to a referendum. And there's no question the pandemic has dramatized inequities in child care. But the pandemic has highlighted all kinds of systemic inequities.

Sen. Liias' amendment stops people from being taxed twice on real estate sales. Washington's real estate excise tax (REET) taxes the sale of all real property. To prevent the taxes from stacking, the amendment specifies transactions subject to REET would not also be subject to the capital gains tax.

The most significant amendment, however, was Hobbs' amendment to strip the emergency clause out of the bill. Hobbs, a moderate Democrat who emerged a decade ago as a sometimes GOP ally during the Republicans' successful efforts to wrest control from the majority Democrats, said there was no need for an emergency clause; the clause would have put the tax into effect immediately.

There was no debate over Hobbs' amendment.

Without the emergency clause, the capital gains tax is left vulnerable to a citizens' referendum that could leave the decision to pass the bill up to Washington voters.

Votes on amendments are anonymous—done by machine vote rather than roll call, unless otherwise requested—so it is unclear which Democratic senators supported it and how many votes the amendment received in total. PubliCola has reached out to all of Seattle's five Democratic Senators—Sen. Reuven Carlyle (D-36, Ballard, Queen Anne), Sen. David Frockt (D-46, N. Seattle), Sen. Bob Hasegawa (D-11, S. Seattle), Sen. Joe Nguyen (D-34, W. Seattle), Sen. Jamie Pedersen (D-43, Capitol Hill), and Sen. Rebecca Saldaa (D-37, S. Seattle)—to ask each how they voted on the amendment. None have responded so far.

Progressive lobbyists considered Hobbs' amendment the one sour note of the vote. "One of the big things that's contentious is how urgent this is," said Misha Werschkul, the executive director of the Washington State Budget and Policy Center. "Maybe for some folks it wasn't that pressing."

Republicans denounced the tax with a laundry list of conservative objections: It would harm multigenerational businesses; the bill was pushed through too quickly; the bill is too complicated; the bill robs middle-class Washingtonians. However, the main Republican argument against bill came down to their contention that a capital gains tax is unconstitutional because it's an income tax in disguise.

"We have made every possible argument against this tax today, namely [that] it's unconstitutional—it's an income tax—and people don't want it," said Senator Lynda Wilson (R-17, Vancouver). "What I can say is that we have heard the people. We are choosing to listen to them, and we will not be voting for this income tax … It's just not fair."

Their amendments ranged from monkey wrenching—making the tax voluntary, providing tax credits to those who make charitable donations—to a blatant campaign to undo it: forcing the Attorney General to uphold a 1936 ruling from the states Supreme Court declaring income taxes unconstitutional.

Robinson brushed off Republicans' complaints that the bill was being rushed through without due consideration. She noted that her striker amendment was deliberated by both sides of the aisle.

"In a capital gains excise tax," Robinson ultimately said, "we are asking some of the wealthiest members of our state to contribute slightly more in order to reduce the tax burden on low-income and middle-class Washingtonians."

In 2018, Washington's tax system was listed as one of the most regressive in the nation in an annual report by the Institute on Taxation and Economic Policy (ITEP). The report found that Washington's wealthiest residents spend roughly 3% of their annual income on taxes while low-income families spend almost 18% of their income on taxes.

Sen. Nguyen said working class families have long overpaid their share of taxes. "We're not even asking [the wealthy] to pay what we are paying, what regular working families are paying," he said. "And with that comes economic inequality."

The State Department of Revenue estimates 9,000 tax returns will be subject to the capital gains tax. Those 9,000 returns do not necessarily represent individual filers, rather joint filers. About 18,000 people or, roughly .24 percent of Washingtonians, will have to pay this tax.

"Many say we don't need new revenue because we expect a good financial forecast, but I ask, on the backs of whom?" Seattle's Sen. Saldaa said during the floor debate. "Enough is enough. For many years we've known that our Washington tax code is broken, it's upside down. For many years Washingtonians making the lowest wages have been paying 17% of their income to state and local taxes, while the wealthiest pay a mere 3%, or sometimes even less."

The bill now heads to the House, where progressive Seattle Rep. Noel Frame (D-36, Ballard) is leading the revenue charge as the finance chair of the House appropriations committee. She plans on taking the bill to the House finance committee for a hearing soon, she told PubliCola.

Frame was disappointed about the removal of the emergency clause. She says the state is currently receiving aid from the federal government, "but that money is not going to last forever." Frame would rather have the capital gains tax implemented immediately so when the federal funding stops, there is a new progressive revenue source ready to replace it.

"We basically have to stand up a new program that's going to implement the capital gains tax," Frame said. "That's going to take time. Economic recovery Isn't going to just be for the next three, six, nine 12 months. It's going to be for the next at least 18 to 24 [months]. It's been a tough year!"

For the now progressive are stoking their momentum.

"Taxing the extraordinary profits of the super-rich is an important step in kickstarting Washington state's economy," said Treasure Mackley, Executive Director of Invest In Washington Now. "Now more than ever, we must keep money flowing to our state's people, small businesses, and communities so we can all come back stronger from the pandemic."

Leo Brine is a Seattle-based journalist.

Featured image attributed to pastajosh under a Creative Commons license (CC BY-SA 4.0)