Freedom Foundation

Capital gains income tax moves towards passage in final days of WA legislature

On April 21, the Washington State House of Representatives passed legislation to impose a first-of-its-kind capital gains income tax on certain Washingtonians.

Beginning Jan. 1, 2022, SB 5096 would tax certain capital gains income exceeding $250,000 in a year at 7 percent.

The Senate previously passed the bill by a 25-24 vote, with four Democrats joining the chamber’s 20 Republicans in opposition. Wednesday’s 52-46 vote in the House fell along similar lines, with five Democrats voting against the bill along with all 41 House Republicans.

However, the House amended the version of the bill passed by the Senate and, for a bill to become law, both chambers must pass the same bill text before the end of the legislative session on Sunday.

At this point, the Senate could vote on the version of the bill passed by the House, the House could vote again on the version passed by the Senate or the two chambers could develop and each vote on a third version.

Gov. Jay Inslee has consistently supported new taxes of all kinds and will undoubtedly sign any version of a new income tax the Legislature sends to his desk.

The highest profile difference between the House and Senate versions of SB 5096 involves whether the legislation can be subject to a citizen-initiated referendum.

By default, Article II, Section 1 of the state constitution specifies that legislation takes effect 90 days following the end of the legislative session in which it was passed. During this time, if citizens gather enough signatures to trigger a referendum (at least 4 percent of the registered voters who participated in the previous gubernatorial election), the bill will be subject to a public vote at the next general election.

However, bills deemed “necessary for the immediate preservation of the public peace, health or safety, support of the state government and its existing public institutions” may not be subject to a referendum.

Typically, when the Legislature wishes to insulate a bill from a referendum, it includes an “emergency clause” with standard language as a stand-alone section of the bill. As originally introduced by Sen. June Robinson (D-Everett), SB 5096 contained a traditional emergency clause. However, some Senate Democrats were uncomfortable denying the people the ability to trigger a referendum, and the emergency clause was stripped from the bill when it passed the Senate.

However, House Democrats re-inserted what might be described as a stealth emergency clause. Rather than including the standard emergency clause provision at the end of the bill, they buried a statement in the legislation that the tax is “necessary for the support of the state government and its existing public institutions” — a direct reference to the language in the state constitution about when a bill may be shielded from a referendum.

On the House floor, the Democrat majority shot down two amendments aimed at the stealth emergency clause, one offered by Rep. Jeremie Dufault (R-Selah) and another from Rep. Ed Orcutt (R-Kalama).

Practically, the notion that an emergency justifies new taxes is farcical, as state revenues from existing taxes have continued to increase despite the COVID-19 pandemic and the state will receive billions of dollars in federal bailout funds.

But the true purpose of the tax is to create in principle the state’s first progressive income tax, long a goal of public employees’ unions and other Big Government advocates.

Such efforts have faced strong headwinds in the past. Washington voters have consistently rejected attempts to impose a state income tax at the ballot box. The last time an income tax measure appeared on the ballot, in 2010, it was defeated by nearly two-thirds of state voters.

And when the city of Seattle attempted to impose a progressive income tax via a 2017 city ordinance, the Freedom Foundation and others successfully persuaded state courts to strike down the measure as unconstitutional.

As SB 5096 moves towards likely passage in the coming days, Freedom Foundation attorneys are already gearing up to challenge this latest unconstitutional income tax proposal in court once again.

If you oppose creation of a new capital gains income tax, this is the last chance to contact your state lawmakers to express your opposition. Contact your state legislators by visiting the official webpage for SB 5096 and selecting “Comment on this bill.”