More than six years after Governor Jay Inslee first proposed levying a capital gains tax on the wealthy, the idea is finally getting its day on the Senate floor.
Washington State Senators are currently debating Substitute Senate Bill 5096, sponsored by Senator June Robinson (D‑38th Legislative District: Snohomish County). If you’d like to watch, you can do so right here on TVW.
Republicans like Phil Fortunato are bringing forth a slew of bad amendments to weaken the bill. After the amendments are dispensed with, there will be a vote on final passage. (Republicans have no intention of supporting the bill regardless of what happens to their amendments, which will likely all be rejected.)
For six straight years, NPI has found robust public support for a capital gains tax on the wealthy to fund education in Washington State. I spoke to this research two months ago when I testified in support of SSB 5096 at its first hearing.
Beginning January 1, 2022, an annual state net CGT [capital gains tax] is imposed on the sale or other voluntary exchange of long-term capital assets by individuals. The tax rate is 7.0 percent.
Generally, the tax rate is applied to the capital gains amount reported on the individual’s federal income tax return.
For resident individuals, all capital gains from the sale or exchange of intangible personal property, such as stock, are allocated to Washington. Capital gains from real estate transactions are allocated to Washington if the real property is located in Washington.
Generally, capital gains from the sale or exchange of tangible personal property are allocated to Washington if the property was located in Washington at the time of the transaction.
All taxpayers must file with the state Department of Revenue (DOR), a CGT return for each taxable year; however, a person with no tax liability is not required to file a tax return.
The due date of the state CGT return is the due date for the federal income tax return, unless otherwise required by DOR. The first state CGT returns are due in 2023.
The first $250,000 of capital gains are excluded from the state CGT. Sales or exchanges of some capital assets are explicitly excluded from the state CGT, including:
- all real estate;
- assets held in a retirement account;
- assets transferred as part of a condemnation proceeding;
- livestock related to farming or ranching;
- agricultural land that meets certain requirements; certain types of property used in a trade or business such as machinery and equipment that have been immediately expensed;
- capital assets acquired and used only for purposes of a trade or business of a sole proprietorship;
- timber and timberlands; and
- goodwill received from the sale of a franchised auto dealership.
A deduction is provided for the sale of substantially all of a qualified family-owned small businesses.
A qualified family-owned business is a business where: the owner of the business held a qualifying interest for at least eight years immediately before the sale or transfer of the business;
- the owner of the business or their family member materially participated in operating the business for at least five of the last eight years;
- the business had no more than 50 full-time employees at any time during the 12- month period immediately preceding the sale or transfer of the business; and
- the business had worldwide gross revenue of $6 million or less in the 12-month period preceding the sale or transfer of the business.
The first $350 million of state CGT revenues received each year are deposited into the state Education Legacy Trust Account. The remainder is deposited into a new Taxpayer Relief Account.
The striker does the following as assessed by staff:
- Modifies the title;
- Adds intent language;
- Eliminates the maximum number of employees a business may have for its sale to qualify for the small business deduction;
- Increases the qualifying gross income threshold for the small business deduction from $6,000,000 to $10,000,000;
- Removes the section of the bill that would require ambiguities to be construed in favor of the application of the tax;
- Removes the section of the bill that would authorize reciprocal tax collection agreements;
- Modifies the deposit and distribution of tax collections: Deposits the first $350,000,000 collected each fiscal year into the Education Legacy Trust Account, deposits the next $100,000,000 into the general fund, and deposits the remainder into a newly created taxpayer fairness account;
- Provides annual inflationary adjustments for the $250,000 exclusion amount, $10,000,000 gross income threshold for the small business deduction, and account distribution amounts; and
- Makes technical corrections and clarifications.
It is truly gratifying to see the Senate finally take up this worthy idea and move it to a floor debate. We look forward to witnessing the Senate give this vitally important progressive tax reform idea a successful vote off the Senate floor.