Washington state legislators are making their latest attempt to impose an unconstitutional income tax on its residents. With the passage of S.B. 5096, Washington residents may soon be subject to a 7% tax on the sale of stocks, bonds, businesses, and other investments whose profits exceed $250,000.
Progressives have long tried to impose an income tax on Washingtonians. However, since the passage of a 1930 constitutional amendment that made all taxes “uniform upon the same class of property,” with property defined as “everything, whether tangible or intangible, subject to ownership,” Washington has successfully evaded every attempt to impose an income tax. Just two years after the passage of the 1930 amendment, a graduated income tax was ruled unconstitutional by the state supreme court – a precedent that holds today. Courts also struck down a 2017 Seattle ordinance establishing a progressive income tax.
That hasn’t stopped legislators from repeatedly proposing an income tax to voters. Since 1930, Washington voters have defeated 10 ballot measures to impose a personal or corporate income. Most were rejected by a resounding 2/3 majority. Voters expressed their opposition most recently in 2010 with a 64-36% vote against a state income tax – even though it would only have affected income higher than $200,000 and reduced other taxes in return.
Washingtonians have frequently made their preferences clear. But this year, politicians have shrewdly labeled their capital gains tax legislation as an excise tax. Excise taxes are imposed on the sale of specific goods and services. They’re legal under the state constitution – in fact, the state already imposes a real estate excise tax that ranks as the highest in the region. Democrats insist that the labeling ploy will allow the capital gains tax to withstand scrutiny in the courts, where several lawsuits have already been filed by the Freedom Foundation and the Opportunity for All Coalition.
But capital gains are already considered income in every other state that taxes them. According to the IRS, capital gains are taxable as income since “almost everything you own and use for personal purposes, pleasure, business or investment is a capital asset” – including your home, stocks, jewelry, and business property.
“The Washington Constitution is unambiguous,” said Freedom Foundation CEO Aaron Withe. “Taxpayers can’t be treated differently based on the amount of their income. It’s both punitive and illegal.” Indeed, besides its unconstitutional status as an income tax, the capital gains tax would not be uniform, as is required under the constitution. Moreover, the Freedom Foundation points out in its lawsuit that the capital gains tax is unlawful under the Commerce Clause of the United States Constitution because it treats all sales of capital by Washington residents as taxable gains – including sales that occurred out-of-state.
Democrats have also carefully worded their legislation to ensure that voters will not have the opportunity to consider it as a referendum. Allowing voters to have a say could seriously endanger the capital gains tax proposal – judging by history, voters would likely make it the 11th consecutive income tax proposal to fail. So, Democrats wrote an emergency clause into the law, thereby prohibiting voters from collecting signatures and mobilizing against the new tax in a referendum movement. With the inclusion of the phrase that the bill is “necessary for the support of state government and its existing public institutions,” Democrats have insulated the proposal from the likelihood that it will appear on the ballot in November. The courts, not the people, are now left to decide the validity of the tax.
Rather than tiptoeing around the state constitution to create an income tax, Washington legislators should look to their record state revenues to advance their priorities. Washington has more than $3.8 billion in surplus funds, primarily as a result of Covid-era policies. 12 states across the country, including regional competitors like Arizona, Wisconsin, and Montana, used their surpluses to cut taxes across the board, often on both income and property.
If enacted, a capital gains tax will ultimately create a less competitive business environment in the state of Washington. Entrepreneurs in Washington will start looking to business-friendly states like Florida, Texas, and regional competitors, rather than subject themselves to a high capital gains tax on their burgeoning profits. Rather than hobbling their competitive advantage and burdening their residents with a historic new tax, Washington should follow the example of these states and promote pro-growth, low-tax policies to facilitate a flourishing economy.