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).

Washington State: Lowest Marginal Tax Rates for Pass-Through Businesses

According to the Tax Foundation, Washington State has the lowest marginal tax rate for "pass-through businesses." A "pass-through" business includes sole proprietors, S Corporations, limited liability companies (LLCs) and partnerships.

The Tax Foundation calculates Washington State's "Top Marginal Tax Rate" for Sole Proprietorships and Partnerships (including LLC's which have no made an "S election") at 42.6%. It calculates the "Top Marginal Rate" for S-Corporations at 39.6%.

The rates calculated for Idaho are 48.2% for Sole Proprietorships and Partnerships and 45.3% for S-Corporations. The rates calculated for Oregon are 49.8% for Sole Proprietorships and Partnerships and 46.8% for S-Corporations. 

The reason that Washington rate is lower than other states is because Washington State does not have an income tax.

Additionally, the Tax Foundation reports that 95% of businesses nationwide are "pass-through" entities. This means that Washington State has a significant edge over other states. 

The Tax Foundation's report can be found here.

Washington State is Number 1! For liquor taxes…

Washington State has the highest liquor taxes in the nation! Washington residents, as the end purchaser, pay the following taxes on liquor (either directly, or as price markup for taxes paid by distributors and retailers):

• 20.5% sales tax on spirits,
• + a $3.77 per liter excise tax,
• + 17% of gross revenues of retailer (termed a "license fee")
• + 10% of gross revenues of distributors.

According to the Tax Foundation, this results in the highest liquor taxes in the nation, with some taxes approaching 100% of the sale price of some products. The Tax Foundation calculates Washington's state taxes on spirits at a $35.22 per gallon, whereas Idaho is $10.92 and Oregon $22.73 per gallon. The national median liquor tax is $5.53 per gallon.

All info from an excellent piece at the Tax Foundation.

Not surprisingly, this has resulted in Washington residents purchasing liquor in Idaho and Oregon. In response, there has recently been a bill introduced in the legislature to reduce the Washington sales tax from 20.5% to 6.5% over 8 years. Certainly this is a step in the right direction.

Sales Taxes (nationwide) going up.

The Rockefeller Institutes reports that total State Tax collections were up 6.1% year-over-year from 2012 to 2013 (through the end of 3^rd quarter, 2013). In fact, Q3 (2013) was the 15^th consecutive quarter in which revenues were up. Of these revenues, personal income revenues rose 5.3%, sales revenues rose 5.6% and corporate tax revenues rose 1.9%.

These significant increases in personal income revenues and sales tax revenues indicate growth of both personal income and consumption from 2012 to 2013 and the increases in revenues bode well for State government financing.

Resource: http://www.ftportfolios.com/Commentary/MarketCommentary/2014/1/13/week-of-january-13th

Washington Marijuana Law won’t be blocked by the Feds!

Today, Attorney General Eric Holder confirmed that the Federal Government will not (at least for now) challenge Washington State's recreational marijuana law.

The Attorney General has instructed U.S. Attorneys to use prosecutorial discretion to focus on prosecuting individuals or entities engaged in the following types of activity:

• Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
• Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
• Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
• Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
• Preventing marijuana possession or use on federal property.

This from a Memo to U.S. Attorneys from James M. Cole, Deputy Attorney General.

Presumably, therefore, Federal Prosecutors will focus on prosecuting individuals/entities engaged in the above activities, but not recreational use. Although the Federal government could jump back in to enforce federal law at any time, the Attorney General's guidance on prosecutorial discretion should be welcome news to those in support of recreational marijuana in Washington State.

For more information, see the Seattle Times here.