Gov. Inslee Proposes a Washington State Capital Gain Tax

Governor Inslee's 2015-17 budget has an anticipated deficit of just under $2 Billion (expected revenue of $37.1B, Inslee budget of $39B in expenditures).

To compensate, Governor Inslee proposes several tax increases including a brand new 7% Washington State Capital Gains Tax.

This is a brand new income tax, currently Washington State does not have any form of income tax. As previously discussed, Washington State's lack of income taxes has helped to establish its edge over many other states in tax competitiveness. Washington's lack of income tax has helped it achieve the lowest State marginal tax rate for pass-through entities, gain 11^th place on the 2015 State Business Tax Climate Index, and rank 4^th among the states for mature retail stores & call centers.

Inslee's Capital Gains Tax Proposal Key Facts (drawn from FAQ on HB 1484/SB 5699)

• Capital Gain Rate of 7%
• Applies to Long Term capital gain income above $25,000 (single) $50,000 for married couples. Generally, based on gains as reported on federal tax returns.
• Exemptions:
  • Retirement Account gains
  • Family Home sale exemption (only if (1) IRC § 121 otherwise applies or (2) the home has been owned for 20 years and used as personal residence for at least 10 years).
  • Agriculture Property
    • Exemption only applies to sale of "cattle, horses or breeding livestock" (if more than 50% of taxpayers gross income is from farming/ranching)
    • Exemption for sale of agricultural land: exemption only applies to land held for at least 10 years (assuming taxpayer has "regular, continuous and substantial involvement in the operation of the agricultural land")
  • Timber
• Credits
  • Individual can take a credit for capital gains taxes paid in other states for gains subject to the Washington Tax.
  • No credit for federal capital gains taxes paid.

Conclusions

Imposing any form of income tax will bring Washington State down in its tax competitiveness with other states. As reported by the Washington Policy Center, capital gains tax is an extremely volatile revenue stream for governments and Governor Inslee proposes to allocate these revenues solely to education spending. Additionally, the Washington Policy Center questions the constitutionality of Governor Inslee's proposal and cites to former Washington State Supreme Court Justice Phil Talmadge's 2010 legal analysis of Initiative 1098 (2010 Initiative to impose and income tax, that initiative ultimately failed 64.15% against, 35.85% in favor).