Washington Senate Democrats pass capital gains tax in face of constitutional questions

(The Center Square) – Washington Democrats passed the first capital gains tax to ever survive the floor of the state Senate in a narrow vote Saturday.

Senate Bill 5096, introduced by state Sen. June Robinson, D-Everett, passed by a vote of 25-24 following four hours of debate on Saturday. The bill taxes profits on sales of stocks, bonds, and other assets in excess of $250,000. It is estimated to raise $550 million per year for the state and exempts real estate and retirement accounts. If signed into law, the capital gains tax will join those seen in 41 other states and the District of Columbia.

The news comes as state lawmakers grapple with growing calls to tax the rich in a contentious budget year in which Senate Democrats are searching for ways to repair the damage that the pandemic has wreaked on schools, businesses, and taxpayers.

State lawmakers and Gov. Jay Inslee have floated a capital gains tax as far back as 2015 with the intent of taxing the sale stocks, bonds, and other assets. Proposals have stopped short in the Senate where several Democrats like state Senators Mark Mullet, D-Issaquah, and Tim Sheldon, D-Potlatch, have led opposition to new taxes.

Since winning back the chamber in 2017, Senate Democrats have banked their hopes of passing a capital gains tax this year on the retirement of its strongest Democratic critics like ex-Senator Dean Takko and the party’s 29-20 majority.

Opponents have long argued that the odds of a capital gains tax surviving in the state’s courts, which have deemed capital gains taxes as unconstitutional for the past 60 years now, are incredibly low. Washington’s recent budget forecasts show growth over the next four years, they say, and new taxes are a solution in search of a problem.

Supporters of SB 5096 have made the case that a capital gains tax will help keep Washington’s balance sheets in the black if the state intends to check off its list of overdue housing projects and infrastructure investments. Moreover, it would help transition the state from its reliance on sales taxes, which studies show burden low-income households the most.

The bill’s passage did not come without some eleventh-hour pushback by Senate Republicans whose 15 proposed amendments all saw quick deaths on the floor.

One amendment from state Sen. Phil Fortunato, R-Auburn, would have stripped the state of all authority to collect a capital gains tax, leaving taxpayers with the choice to opt in if they chose. Another amendment to the bill from state Sen. Ann Rivers, R-La Center, included a charitable deduction.

Throughout the day, Senate Republicans reiterated their constitutional concerns about the bill, calling it exactly what they believe it is, a state income tax, which is banned under the Washington constitution. According to Robinson’s claims, SB 5096 is “an excise tax on valuable assets.” Her Republican colleagues were unconvinced.

“This income tax is unconstitutional,” said Sen. Keith Wagoner, R-Sedro Woolley. “It is also not want our constituents want.”

The only three adopted amendments to SB 5096 on Saturday came courtesy of the Senate’s Democratic majority, the most substantial of which stemmed from a striking amendment from Robinson.

Robinson’s changes center around several alterations to the small business deduction, which include increasing the income threshold from $6 million to $10 million, removing employee head counts, and adding inflationary adjustments.

Under the amendment, the first $350 million in state revenue would go towards education while another $100 million would go into the state general fund. The rest would be placed in a taxpayer fairness account.

The second adopted amendment by state Sen. Marko Liias, D-Lynnwood, would exempt the sale of controlling interests from the capital gains tax if it falls under the state real estate excise tax.

Another adopted amendment from Sen. Steve Hobbs, D-Lake Stevens, cut out SB 5096’s emergency clause, giving voters more of a chance to repeal it at the ballot box.

Sen. Doug Ericksen, R-Ferndale, raised objections that passing the bill now defied political precedent by leaving such a big striking amendment unreviewed. Rubber-stamping such amendments is not unprecedented in the Senate where a GOP majority rammed through a $43.7 billion budget 24 hours after its release in 2017.

State lawmakers have just under two months to review SB 5096 before they adjourn on April 25.

SB 5096 joins a short list of tax bills sitting in the state legislature this session. A capital gains tax proposal introduced in the House by Rep. Tana Senn, D-Mercer Island, remains in committee while a proposed wealth tax remains in play.

SB 5096 saw no votes on Saturday from Senate Republicans in addition to Hobbs, Mullet, Sheldon, and Sen. Annette Cleveland, D-Vancouver. It awaits a vote in the House before it can be reconciled into one bill and delivered to Inslee’s desk where it is expected to be signed into law if passed.

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