Inslee's proposal is an income tax

Despite the budget being balanced, billions in reserve and projected revenue growth of 7.2%, Gov. Jay Inslee is yet again proposing an income tax on capital gains in his new budget.

The governor, however, claims that this type of tax isn’t an income tax. What does he know that the IRS and every other state across the country doesn’t?

IRS: “You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

Nonpartisan legislative staff: “Most states do not have separate capital gains tax rates. Instead, most states tax capital gains as ordinary income subject to the state’s income tax rates.”

Do states without personal income taxes tax capital gains? No. For example:

Not a single state with an income tax on capital gains describes this type of tax as dependable or stable. Instead, here are a few examples discussing the extreme volatility problems inherent with taxing this type of income:

“California’s tax revenues have numerous volatile elements, but among the more significant sources of revenue volatility are the state’s tax levies on net capital gains through the personal income tax.”

Virginia: “Capital gains is the most volatile tax source that any state has to forecast. It is not dependable or stable.”

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What are the motivations behind the Washington income tax on capital gains proposals? Thanks to public records we know the goal is to set up a lawsuit in hopes of imposing a graduated income tax without a constitutional amendment. Consider what was written in the following emails from Sen. Jamie Pedersen:

Washington’s Department of Revenue (DOR) says: “The federal capital gains tax is characterized as an income tax. One potential challenge to a capital gains tax proposal is that opponents may characterize the Washington capital gains tax as an income tax...”

More from DOR on capital gains tax: “susceptible to constitutional challenge as an income tax prohibited by the Washington state constitution...”

On September 13, 1960 the state Supreme Court issued a unanimous one page ruling with this sage advice: Don’t ask the Court to reverse its numerous rulings prohibiting a graduated income tax; instead amend the constitution.

The voters have already rejected 6 constitutional amendments to allow a graduated income tax. The state Supreme Court this year also refused to hear the Seattle income tax case that was trying to challenge the prior income tax ban court rulings.

Washington’s Department of Commerce has made the state’s lack of an income tax a major selling point for its “Choose Washington” campaign: “We offer businesses some competitive advantages found in few other states. This includes no personal or corporate income tax.”

Excise taxes are transaction taxes that apply at point of sale on price or volume. Taxes applied on income from a transaction are not excise taxes. Prepare to be amazed, they are income taxes. This is why every tax agency outside of Washington says a capital gains tax is an income tax.

2020 has taught us that there are many things in life that are uncertain. A capital gains tax being a highly volatile income tax is not one of them. This is not a debate unless you are trying to circumvent Washington’s constitutional prohibition on graduated income taxes.

– Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. Email him at jmercier@washingtonpolicy.org.