Washington state Senate narrowly approves capital gains tax after marathon debate

UPDATE: Washington state House approves capital gains tax bill, sends it back to Senate

The Washington state Senate on Saturday narrowly approved a bill to introduce a tax on capital gains from the sale of assets such as stocks and bonds. It now heads to the House of Representatives for further consideration.

Lawmakers have considered enacting such a tax for years, but this marks the first time they’ve passed it off the floor in either chamber.

Saturday’s debate featured all the hallmarks of long-held discussions surrounding the tax: Democrats say it’s a first step toward a less-regressive tax system in Washington state and impacts a measly percentage of wealthy taxpayers. Minority Republicans argue it’s volatile, an income tax and unconstitutional, and that voters don’t want it.

The bill that passed off the floor had already evolved from what Gov. Jay Inslee originally requested. Further changes were made on the floor, but the proposed tax rate and threshold when the tax would kick in stayed the same.

As it stands, the bill would impose a 7 percent tax on capital gains above $250,000 for individuals and joint filers starting in 2022. A striking amendment adopted Saturday includes a requirement for yearly adjustments to that threshold based on inflation.

Exemptions in the bill include all real estate, retirement accounts, livestock related to farming or ranching, some agricultural land, and timber and timberlands. There’s a deduction in the bill for sales of family-owned small businesses that meet certain qualifications.

Predicted revenue from the tax is estimated at roughly $500-550 million per year. The Department of Revenue estimates it would impact about 9,000 tax returns and less than a quarter of a percentage of the state’s residents, according to Senate Democrats staff.

The first $350 million collected per year would go to the education legacy trust account. In the latest version of the bill, the next $100 million would go into the state’s general fund. The rest would go into a new “Taxpayer Relief Account.”

The bill specifies that revenues headed to that new account are to be used “to offset existing tax burdens via policies such as funding the working families’ tax exemption.”

Lawmakers voted down 15 of 19 amendments on Saturday over the course of debate that stretched over two hours and was followed by another hour and a half of debate on the measure’s final passage. One amendment was withdrawn, three were adopted.

Failed amendments proposed by Republicans included the following ideas: further broadening exemptions, making the tax voluntarily, moving its effective date to after the state’s Tax Structure Work Group has completed its work, and inserting “income tax” into the bill’s language.

“It doesn’t matter what color of lipstick you put on it, it doesn’t change that an income tax is an income tax,” said Sen. Ann Rivers (R-Vancouver) in debate.

A successful amendment from Sen. Steve Hobbs (D-Lake Stevens), one of four Democrats who ultimately voted against the proposal, removed a controversial emergency clause that would have made it more difficult for the issue to go before voters.

Hobbs was joined by Democratic Sens. Annette Cleveland (D-Vancouver) and Mark Mullet (D-Issaquah) in his no vote on final passage. All Republicans voted against it, along with Sen. Tim Sheldon, a Democrat from Potlatch who caucuses with Republicans.

After the vote, Hobbs released a statement emphasizing that the state needs to prioritize spending for transportation infrastructure. He’s the chair of the Senate Transportation Committee.

“A transportation revenue package will create jobs, thousands of them, and will give Washington a competitive advantage,” Hobbs’ statement reads. “The people of this state only have so much appetite for taxes, and we must be targeted and deliberate in the taxes we choose to raise. We must get an appropriate return on our investment and I’m afraid a capital gains tax doesn’t meet that test.”

Cleveland’s prepared statement also emphasized that a transportation revenue package should be the Legislature’s top priority.

Mullet explained his vote in saying the state budget is in a good position as-is. Other Democrats have argued that, even if that’s so, it’s time to make progress toward shifting the state’s tax burden to wealthier residents.

“Time will tell, but I expect the capital gains tax to emerge as a referendum on the ballot this November, and I am eager for voters to be able to weigh in on this issue themselves, which is as it should be,” a prepared statement from Mullet reads. “When they do, I think the voters in my district will reaffirm that I represent their concerns faithfully.”

A vast majority of Democrats were united in approving the measure on a 25-24 vote.

“Our hard-working Washington families are ready for us to reform and rebuild our tax code,” sponsor Sen. June Robinson (D-Everett) said on the floor Saturday. “They are asking for the wealthy few to be part of equitable investments in our state’s future.”

This story was originally published March 6, 2021 at 7:05 PM with the headline "Washington state Senate narrowly approves capital gains tax after marathon debate."