Depending on your perspective, Washington’s capital gains tax is either a tax on the state’s wealthiest citizens to provide needed money for public schools, or the first step toward a state income tax that is driving away tech entrepreneurs.
Which camp you find yourself in will likely determine whether you vote Yes on Initiative 2109 to repeal the tax the Legislature installed in 2021, or No to keep it intact.
The 7% tax is levied on earnings in excess of $262,000 from the sales of stocks, bonds and other investments. The sales of homes and farms are exempt. Roughly 0.2% of Washington’s residents pay this tax.In fiscal 2023, its first year of collection, Washington’s tax collected $847.5 million, according to the Office of Financial Management. The OFM is predicting $363 million in fiscal 2024 for a total of $1.215 billion for the two-year budget cycle. A fundamental facet of a capital gains tax is that the revenue is expected to fluctuate from year to year. Forty-one other states have capital gains taxes. In fiscal 2023, $500 million of Washington capital gains revenues went to the Education Legacy Trust Account, which covers preschools, child care subsidies, special education and community and technical colleges, according to the OFM. The first $500 million each year goes to this account. The remaining $347.5 million in 2023 went to a school construction account. At press time, the appropriate Office of the Superintendent of Public Instruction officials had not been available to discuss a further breakdown of where that money was spent. An OFM analysisconcluded that passage of I-2109 would take away $2.2 billion in state revenue over the next five years. Supporters of the initiative branded this state government analysis “partisan rhetoric.”“Many see this as a backdoor to a state income tax. There is overstated partisan rhetoric that it’ll cut money from schools,” said Rep Jim Walsh, R-Aberdeen and chairman of the state GOP party, who with the organization Let’s Go Washington led the petition drive to put I-2109 on the November ballot.“Do we want to take away $2.2 billion?” said Treasure Mackley, executive director of Invest in Washington Now. Mackley and Stephan Blanford, executive director of the Children’s Alliance, said the initiative would severely cut access to state subsidized child care and preschools. This would especially impact women in the workforce, who could have to drop out or cut back their hours because less state-subsidized child care and preschools will be available, they said.Walsh countered that legislators can weigh the priorities of child care and other education needs against other state expenditures during the normal course of appropriating money. “It will create more aggressive budget negotiations going forward,” he said.In 2022, a Douglas County Superior Court judge ruled that the capital gains tax is really an income tax, which is unconstitutional in Washington. Most Washington legislators are skittish about making an income tax legal, which is generally considered a political kiss of death. The Washington Supreme Court overruled the Douglas County judge in 2023 and declared the capital gains tax an excise tax and not an income tax.Walsh disagrees with the Supreme Court’s ruling, noting that many states and the federal Internal Revenue Service have classified their capital gains taxes as income taxes. “That’s a legal fiction created by the state Supreme Court. The reason to repeal [the capital gains tax] is that people can right a legal fiction,” he said. Another Let’s Go Washington initiative drive collected enough signatures in 2023 to successfully pressure the Legislature to pass a law in 2024 to forbid installation of any state income tax.Walsh and Let’s Go Washington spokeswoman Hallie Balch contend that Democratic legislators still want to use the capital gains tax as a way to sneak in an income tax at a later date. They point to 2020 and 2022 remarks by Sen. Jamie Pedersen, D-Seattle, about sending a legal challenge to a capital gains tax to the Washington Supreme Court encouraging the court to revise its decisions from the 1930s and 1950s that declared an income tax unconstitutional.“This is just a false argument,” Pedersen said. He countered that the 2023 Supreme Court ruling did not change the 1930s and 1950s decisions that declared a state income tax unconstitutional. “The opportunity for an income tax came and went. That ship has sailed. There is no gateway,” he said. Balch and Walsh also contend that the existence of a capital gains tax will encourage high-tech experts — frequently paid with stocks — to leave Washington.Software engineer Vijay Boyapati agrees.Boyapati, 45, is an Australian native who joined Google in its early years and earned a massive amount of money from the sale of Google stocks when it went public. “Immigrants don’t come to America to tax the rich. They come to America to become rich,” he said.Boyapati moved to Seattle 18 years ago to work for other tech companies because this state did not have a capital gains tax. “It was a big motivation when I moved here,” he said. Today he is a stay-at-home dad with young kids while his wife works in biotech, another industry that routinely uses stocks as part of its pay packages. “I have had several friends leave Washington because of this,” he said.“On this issue, I think tech will vote No,” Boyapati said. “It’s a question of ‘Do I pay the extra tax or move elsewhere?’” Blanford of the Children’s Alliance and Mackley of Invest in Washington Now noted that Washington has long had the most regressive tax structure in the United States — meaning low-income people pay a greater proportion of their income in taxes than richer people. The capital gains tax has moved Washington from 50th place to 49th place in the ranking of regressive state taxes because the state still gets most of its income from property and sales taxes, they said.Mackley contended that Let’s Go Washington founder Brian Heywood, a Redmond Hedge fund manager, is backing I-2109 because his clients would likely pay capital gains taxes. However, Balch said Heywood’s hedge fund focuses on Japanese businesses and doesn’t have Washington clients.
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