History in the making: Washington State Senate opens floor debate on capital gains tax

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.

The Senae’s non­par­ti­san staff describe the first sub­sti­tute as fol­lows:

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.

Sen­a­tor Robin­son has offered a strik­ing amend­ment, which can be read here.

The strik­er does the fol­low­ing as assessed by staff:

1. Mod­i­fies the title;
2. Adds intent language;
3. Elim­i­nates the max­i­mum num­ber of employ­ees a busi­ness may have for its sale to qual­i­fy for the small busi­ness deduction;
4. Increas­es the qual­i­fy­ing gross income thresh­old for the small busi­ness deduc­tion from $6,000,000 to $10,000,000;
5. Removes the sec­tion of the bill that would require ambi­gu­i­ties to be con­strued in favor of the appli­ca­tion of the tax;
6. Removes the sec­tion of the bill that would autho­rize rec­i­p­ro­cal tax col­lec­tion agreements;
7. 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;
8. 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
9. 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.