NPI's Cascadia Advocate

Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's unconventional perspective on world, national, and local politics.

Saturday, March 6th, 2021

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.

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