Here’s what you need to know about the biggest battle of the 2021 legislative session
What’s in the Governor’s income-tax proposal
Gov. Jay Inslee has proposed SB 5096, which would impose an income tax on the state of Washington – and make it possible for the Legislature to enact a bigger and broader income tax if it survives court challenges. This starter income tax targets capital gains income, including the sale of property, stocks and financial instruments.
What it does:
- Imposes a 9 percent tax beginning Jan. 1 on the sale of long-term capital assets.
- Provides deductions of $25,000 for a single individual or $50,000 for a joint return.
- Tax does not apply to gains from sale or exchange of:
- Retirement accounts
- Farmer livestock
- Agricultural land used by farmers
- Projected to increase tax collections $1.1 billion during the 2021-23 biennium, and $2.4 billion at full implementation in 2023-25.
- Tax collections would start April 15, 2023.
- 58,000 taxpayers would be impacted.
- The state’s estimates assume the tax would be a stable source of money. But year-to-year tax collections are extremely volatile, with capital gains varying fourfold over the last 10 years.
Notable language in the bill
- The words “income tax” are used 11 separate times in the bill.
Advocates of higher taxes and spending prefer to call this proposal an “excise tax,” to duck public opposition to an income tax, and possibly avoid unfavorable court rulings. But every tax authority in the country, including the Internal Revenue Service, regards such taxes as an income tax. Indeed, the governor’s proposal uses federal income tax returns to determine the new taxes that would be due in Washington state.
- The bill relies on federal income-tax calculations. We can trace the definitions used in the bill, as below.
- How does the Department of Revenue calculate tax liability?
Taxpayers owing capital gains tax must file their federal income tax returns with the agency.
- Bill gives the Department of Revenue authority to require any Washington resident to file federal income tax forms with the state.
Initially the state would use an honor system, but the bill allows DOR to make the requirement mandatory.
- Overturns longstanding principle of taxation.
Common law has always required strict construction of laws imposing taxes, permitting taxes to be imposed only if the language is unequivocal. Section 14 overturns that principle with regard to this tax, directing the courts that interpretations “must be liberally construed in support of application of the tax.”
- Emergency clause.
A new wrinkle in this year’s proposal is that the bill contains an “emergency clause.” This means that the law takes effect immediately and eliminates the option of a public referendum. Emergency clauses are intended to be used in cases of actual emergency. But in this case, there is no emergency, because the tax would not take effect until January 2022, and the first tax collections would be due in April 2023.
What’s the problem with an income tax?
- We don’t need it. Even with the downturn in tax collections we have experienced due to the coronavirus shutdown, tax collections are still up over the last biennium.
- We have enough to meet our needs, if we spend wisely.
- The real problem is reckless spending by the Legislature under Democratic control. Advocates of higher taxes and spending have been caught short by the recent downturn, and they are looking for a way to sustain that spending.
- The tax won’t help with our current economic situation. It is being touted as a COVID relief measure, but we can expect court challenges that will delay its implementation until after the virus has passed.
- It also won’t make our tax system “more fair,” as advocates claim. The taxes in our state that put a disproportionate burden on those of low income will remain on the books. These include taxes on cell phones, alcohol and marijuana. Indeed, many who advocate an income tax also advocate measures that would increase gasoline prices, which would increase the burden on working families.
- This isn’t about fairness – it’s about “more-ness.” This really isn’t about redistributing the tax burden. It’s about increasing it.
- Make no mistake – this is an income tax. Advocates are trying to tell us this isn’t an income tax, to avoid the public’s traditional apprehension about an income tax. But word games don’t change things. This is clearly an income tax, by every legal definition and every interpretation by tax authorities nationally. The tax would be based on federal income tax returns. This word game is an attempt to misdirect us.
- An income tax is a bad idea for our state.
- We can be sure this capital gains income tax would be expanded into a general income tax rather quickly. That’s because capital gains taxes are among the most volatile taxes the state can impose. We know there will be economic downturns in the future, and when that happens, tax collections will tank, and the Legislature will look for an easy source of money. A general income tax is the obvious choice.
- We are one of nine states that does not have an income tax, and this has given us a competitive advantage. Our economy has grown up around it. This has helped make Washington prosperous. It’s why we landed the tech industry, the engine of the state’s general prosperity. We lose this advantage with an income tax.
- The income tax would become yet another excuse to avoid the tough decisions we have to make about spending and budgeting.
- The new tax will discourage investment in our state and hamper our economic recovery from the COVID shutdown. The tax will slow our economic growth, meaning fewer jobs for working families.
- Most importantly, the people don’t want it. They have rejected the idea at the polls 10 straight times over the last 86 years. We should respect the people.
- The people have spoken loud and clear on this issue. The problem is that many in Olympia are hard of hearing.