Washington state House approves capital gains tax bill, sends it back to Senate
The Washington state House of Representatives approved a bill to impose a tax on capital gains from the sale and exchange of assets such as stocks and bonds with four days remaining in the 105-day legislative session.
Debate on more than 20 amendments, the vast majority of which were proposed by Republicans who oppose the tax, lasted late into Tuesday night. Lawmakers finished debate Wednesday afternoon and approved the latest version of the bill on a 52-46 vote.
It now heads back to the Senate, where lawmakers will decide whether they agree with changes made to the proposal since they passed it out of their chamber by a margin of just one vote last month. The Senate Republican leader forecasts pushback.
Lawmakers have considered enacting such a tax for years, but its approval by the Senate earlier this session marked the first time it had passed off the floor of either chamber, as McClatchy previously reported.
If it becomes law, Senate Bill 5096 would impose a 7 percent tax starting in 2022 on capital gains above $250,000 for individuals and joint filers — that threshold would be adjusted yearly based on inflation.
Its advocates cast the bill as a step toward balancing the tax code in a state where low-income residents pay a higher proportion of their incomes in tax than top earners. Opponents say in part it’s volatile, unpopular, not needed, and an income tax in violation of our state constitution.
Most Democrats voted for the bill in the House and most Republicans voted against it, but votes did not fall precisely along party lines. A handful of Democrats voted against the bill: Reps. Alicia Rule of Blaine, Dave Paul of Oak Harbor, Mari Leavitt of University Place, Dan Bronoske of Lakewood, and Mike Chapman of Port Angeles.
If given final approval and signed into law, the capital gains tax is expected to draw a court battle. In a fiscal note, the state Attorney General’s Office assumes it would result in at least one lawsuit challenging its constitutionality.
The bill includes several exemptions, including for real estate, retirement accounts, timber, and family-owned small businesses that meet certain qualifications. The current version is expected to impact about 8,000 households and bring in about $500-550 million in revenue per year starting in 2023.
“This is how we are re-balancing the tax code so the wealthy pay their fair share, and working Washingtonians finally get a break,” Rep. Noel Frame of Seattle said in floor debate. “This capital gains excise tax ... is a key tool of progressive tax reform and the funds will go towards our most important investment: Our kids.”
Tuesday’s late-night debate
The version that passed out of the House would direct revenue from the tax into the Education Legacy Trust Account, which can be used for supporting schools, expanding access to higher education, funding early learning and child care programs, and other costs related to improving education.
That’s a shift from the Senate-approved bill, which would’ve sent money to that account, the state’s general fund, and a new account to be used to offset existing tax burdens.
Money from that last account could’ve been spent on efforts such as the long-unfunded Working Families Tax Credit. The full Legislature has now approved a bill expanding that credit for low-income workers and families in broadly bipartisan votes and committed to funding it.
In debate Tuesday, Rep. My-Linh Thai of Bellevue, who sponsored that bill, said funding for the tax credit doesn’t need to be part of the capital gains tax bill anymore because it will be included in the state’s base budget.
Some Republican-sponsored amendments that were debated and failed Tuesday had to do with where the money would be directed. One proposed by Rep. Ed Orcutt of Kalama, for example, would’ve directed funding to some one-time spending items. He cited the volatility of a capital gains tax in debate.
Another change made in the House has been the target of heated debate and criticism: The addition of the statement “the tax levied ... is necessary for the support of the state government and its existing public institutions.”
Republicans argue that language is aimed at making it more difficult for voters to weigh in on the new tax.
Before the Senate approved the bill along the narrowest possible 25-24 vote, a successful amendment from Sen. Steve Hobbs (D-Lake Stevens) removed similar language, along with an explicit emergency clause that would have nixed the possibility of a referendum.
Hobbs was one of four Democrats who ultimately voted against the bill — that tally includes Sen. Tim Sheldon, a Democrat from Potlatch who caucuses with Republicans.
The language the House since added back to the bill mirrors language in the state constitution, which says the people can, in part, order a referendum on a law “except such laws as may be necessary for the immediate preservation of the public peace, health or safety, support of the state government and its existing public institutions ...”
“The truth is, this clause will prevent my neighbors, my community, your neighbors, and your community, from having a say on an income tax,” Rep. Peter Abbarno of Centralia said in floor debate.
Taking away the possibility of a referendum would leave voters with the possibility of an initiative, which requires them to collect twice as many signatures as a referendum does.
Republican amendments aimed at removing that language in the bill failed Tuesday night. Democrats emphasized in debate that funding child care and early learning is a necessity — Republicans’ rebuttal to that argument was that a new tax isn’t necessary to support those causes.
What happens next
It now heads back to the Senate, where Minority Leader Sen. John Braun of Centralia said the minority caucus will strongly oppose the addition of that language. Speaker of the House Rep. Laurie Jinkins of Tacoma told reporters Tuesday that she doesn’t see the bill as any more imperiled now than it had been previously.
“I’d like to believe we have the votes in the Senate to not concur and push back on that, we’ll see,” Braun said. “That’s going to be a big issue over the coming days.”
Editor’s note: This story was updated after the vote on final passage was reconsidered and the vote totals changed from 53-45 to 52-46, with Rep. Bruce Chandler of Granger changing his vote.
This story was originally published April 21, 2021 at 4:26 PM with the headline "Washington state House approves capital gains tax bill, sends it back to Senate."
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