Washington House passes capital gains tax in final days of session, and send back to Senate

UPDATE: The Senate rejected the House amendments and appointed a conference committee on April 22.

On day 101 of 105 in Washington's legislative session, the House of Representatives approved a new capital gains tax in a tight 52-46 vote.

Passed by the Senate in March in another narrow vote, Engrossed Substitute Senate Bill 5096 would impose a new 7% tax on certain capital gains income including profits from selling long-term assets such as stocks and bonds totaling more than $250,000 beginning in 2022. Earned income from salaries and wages are not considered capital gains, and retirement accounts, home sales and businesses grossing less than $10 million a year would not be subject to this tax.

The tax has long been championed by Gov. Jay Inslee and other Democrats in an effort to create a more progressive tax system in the state and allocate money for early learning and child care. While the tax has been introduced in the legislature several times, it never gained traction until this year.

The tax would raise approximately $500 million each year and impact 7,000 households out of the state's nearly four million taxpayers, according to the bill's fiscal analysis. The yearly earnings are not precise as gains can change year to year.

During a nearly four hour long floor debate Tuesday night, representatives shot down several amendments proposed by Republicans including an amendment that would raise the threshold to $500,000 for joint filers.

Supporters of the bill call it an excise tax that could help close Washington's wealth gap and make the tax system more equitable.

"Today, we are going to take another gigantic step towards justice for the working people of Washington state by finally asking the wealthiest among us to pay their fair share," Rep. Noel Frame said. "This is how we are re-balancing the tax code so the wealthy pay their fair share, and working Washingtonians finally get a break."

Opponents of the bill argue that it is another form of a personal income tax, which goes against the Washington constitution that states taxes must be uniformly applied to all residents. 

"I'm voting against this because I truly believe this is a Trojan horse for a graduated income tax across all Washingtonians, not just the 1%," Rep. Chris Corry said.

With approval from both the House and Senate, the bill would normally head to Inslee's desk for a signature. However, a much-debated clause intended to prevent a voter referendum has sent it back to the Senate for final approval.

While initially removed by the Senate, language was added to the legislation by the House that noted that the tax "is necessary for the support of the state government and its existing public institutions." That language could block the bill from a voter referendum per Article II of the state constitution.

Many lawmakers who opposed the capital gains tax, and predict that the bill will have future legal challenges, opposed the addition of the language.

"The truth is, this clause will prevent my neighbors, my community, your neighbors, and your community, from having a say on an income tax," Rep. Peter Abbarno said.

Others argued that voters have historically voted against more taxes.

"This bill goes around the constitution and tries to enforce a constitutional change by a legislative majority, If we are going to allow that to happen, multiple violations of our state constitution, the least we can do is let people have their say," said Rep. Jeremie Dufault.

The bill now heads back to the Senate, where it is expected to be decided before the legislative session adjourns on Sunday.