Capital gains tax advances in Olympia

The Washington state Senate passed legislation on a capital gains tax during a debate Saturday held online. Republicans say the bill would impose an income tax, but Democrats say the tax would be purely an excise tax.

The vote was close: 25-24. All Republican legislators and some Democrats voted against it. The bill now heads to the House.

Senate Bill 5096 is a 7% capital gains tax “on the sale or exchange of long-term capital assets,” according to the bill’s text. This tax would only apply to high-income Washingtonians.

Raising taxes on the wealthiest residents in the state would “rebalance the tax code” as the state holds the “most regressive” tax system in the nation, according to the bill’s text. The capital gains tax would be imposed as early as Jan. 1, 2022.

“This tax will be very volatile if we’re going to get just the top earners,” Sen. Judy Warnick, R-Moses Lake, said during the virtual floor debate. Warnick voted against SB 5096.

Sen. June Robinson, D-Everett, is SB 5096’s primary sponsor. Robinson said during the debate the state Department of Revenue estimates 9,000 people would pay for the capital gains tax if the bill passes.

“Less than 1% of all Washingtonians will pay this tax,” Robinson said. “When we vote to pass this bill, we’re voting to speed our long-term economic recovery from the current economic decline due to the pandemic.”

Robinson said SB 5096 would tax profits from the sale of stocks, bonds, personal property or businesses exceeding $250,000. Certain things like real estate or retirement savings accounts would not be subject to the capital gains tax.

Warnick said during the debate SB 5096 is nothing new — legislators have been attempting to impose an income tax since 1934 — and legislators must listen to their constituents.

“What a lot of our constituents are afraid of is this (bill) is just the beginning of more taxation,” Warnick said.

Sen. Rebecca Saldaña, D-Seattle, said during the virtual floor debate the state’s tax code is broken and upside down. Low-income workers have been paying 17% of their income to state and local taxes — the wealthy only pay 3% or even less, she said.

Saldaña said she has heard support for SB 5096 from some of the individuals who would be subject to the capital gains tax.

Warnick said the wealthy individuals who say they support SB 5096 and are looking to pay more in taxes are able to do so. Nothing prohibits those individuals from paying more of their income to the state.

Sen. Patty Kuderer, D-Bellevue, said during the virtual floor debate one of her constituents says SB 5096 would make the tax system in the state more equitable and would even be open to paying more than 7%.

“Washington is rated dead last in terms of tax equity,” Kuderer said. “It’s time that we change that.”

Sen. Mark Schoesler, R-Ritzville, voted against SB 5096. Schoesler said during the virtual floor debate proponents of SB 5096 say the state has a regressive tax system. Yet proposed amendments to provide taxpayer relief were rejected during a previous committee hearing.

“The Senate is no longer what it was. It is no longer a firewall to significant potential tax increases,” said Sen. Brad Hawkins, R-East Wenatchee, during the virtual floor debate. Hawkins voted against SB 5096.

Sen. Ann Rivers, R-La Center, said during the virtual floor debate SB 5096 could make its way to the Supreme Court, the state does not need an income tax, and voters have rejected the idea time and time again.

“We often are in a position where we make decisions on the fly about what we think is best for the people that we represent,” Rivers said, “but sometimes, we don’t have to think too hard because they’re constantly telling us.”

The first $350 million collected from the capital gains tax would be allocated to the education legacy trust account, according to the bill’s text. This would support early learning and child care services, especially for families struggling to afford it.

Certain family-owned small businesses that qualify would be exempt from the capital gains tax, according to the bill’s text. Qualified businesses must have had gross revenue of $10 million or less in a 12-month period.

Warnick’s proposed amendment, which would prevent the capital gains tax from being imposed on all sales and exchanges of cattle, horses and livestock, was not adopted.

“I would like to be absolutely sure that the livestock that our hard-working farmers and ranchers may have to sell someday … (are) not included in this particular piece of legislation,” Warnick said.

Sen. Christine Rolfes, D-Kitsap County, said during the virtual floor debate proceeds from the sale of cattle, horses or breeding livestock are already exempt from the capital gains tax as the bill currently stands.

“The amendment would potentially allow a loophole for feedlot owners, and it would create an even larger loophole for the billionaires and multimillionaires who are dabbling in ranching and farming,” Rolfes said.

Sen. Phil Fortunato, R-Auburn, proposed an amendment to make the capital gains tax voluntary for Washingtonians. It was not adopted.

Fortunato said during the virtual floor debate his amendment would allow progressive billionaires to “get their wish,” as it will allow them to contribute as much money as they want to the state.

“There’s nothing stopping them from doing it,” Fortunato said. “The rest of us who don’t want any income tax don’t have to pay it.”

Saldaña said during the virtual floor debate low-income workers have been overburdened with taxes — the state needs SB 5096 to establish a new revenue source that would address peoples’ needs.

“Participation in a civil society is an obligation, not an option,” Saldaña said.

Sen. Sharon Brown, R-Kennewick, also had an amendment that was not adopted to SB 5096. Brown’s amendment would add a referendum clause to the bill, which would allow people to vote on the bill.

“The message the voters have sent over the years is clear — they don’t trust us here in Olympia to make decisions when it comes to their money,” Brown said.

Robinson said residents are free to initiate a referendum on SB 5096 — there is no need to adopt Brown’s amendment.

“If our citizens want to put this to a referendum, they will make that happen,” Robinson said.