Gov. Jay Inslee has proposed a new state capital gains tax, and it’s generated some buzz among legislators. The proposed tax would affect the state’s top 1.5 percent of earners, raising $800 million over two years for a $39 billion budget. The capital gains tax is part of Inslee’s $1.4 billion in proposed tax increases in the 2015 legislative session.
The capital gains would incur a 7-percent tax on profits above $25,000 for individuals, and $50,000 for joint filers, on the sales of stocks and bonds. The tax also would apply to other assets that earn capital gains, such as property sales with profits of $250,000 for an individual or $500,000 for joint filers, with exemptions for a sales of a primary home.
The tax would be deducted from tax returned filled via federal 1040 — line 13. While the tax doesn’t isn’t calculated according to the filer’s total personal income, it’s expected that the majority of people affected would be the top 1.5 percent of earners, says David Schumacher, director of the Office of Financial Management.
It is estimated that 32,000 taxpayers would pay the capital gains tax, and about 1,000 of those taxpayers would account for half of the amount collected, according to Drew Shirk, the assistant director the Washington Department of Revenue. Shirk and Schumacher spoke at a recent Ways and Means Committee, the Senate’s committee that considers the operating budget.
However, the chairman of the Senate Ways and Means Committee, Sen. Andy Hill, R-Redmond, is skeptical of the proposal. He posed the question of whether capital gains would be a stable source of revenue or if it could be swung by a few very wealthy individuals.
Hill, who represents the home base of many of the Eastside’s high tech companies, also expressed concern that people with high incomes simply will choose to leave.
“Doesn’t that worry us that they might take off and move somewhere else? These people certainly have the means to move,” he said.
Also framing the discussion was a study from the Institute on Taxation and Economic Policy released this month showing the state of Washington has the nation’s hardest tax system for the poor and the easiest for those with large incomes. The top 1 percent of earners in the state pay 2.4 percent of their incomes in state and local taxes, whereas the bottom 20 percent pay 16.8 percent, according to the study.
In comparison, the top earners in California pay 8.7 percent of their income in state and local taxes and the bottom 20 percent pay 10.5 percent. According to Forbes writer Janet Novack, the difference comes from Washington state’s lack of income tax and high reliance on sales taxes and local levies.
Schumacher told the committee the capital gains tax “would not shift us from being a regressive tax state to a progressive tax state, but it does begin to address I think what we feel is an unfairness in our structure.”
Washington Realtors Policy Director Bill Clarke spoke against the lax, saying that a capital gains tax would be bad for people who now plan to sell investment properties such as rental homes.
“Families like that, when they sell a property like that, they do so for a couple of reasons, to send their kids to college, to try to retire, to pay for medical bills, to deal with divorce,” he said to the committee. “This is far more than a tax on the 1 percent.”
But Sonya Campion, whose husband Tom Campion is the founder of national clothing retailer Zumiez, told the committee that people in her family’s position can afford to pay the tax.
“People like me pay six times less than the hardworking Washingtonians who earn $21,000 a year,” she said. “It’s not too much to ask those who have benefited the most from economic growth over the last couple decades to pay a little bit more to fund schools and other investments that benefit all Washingtonians.”
Schumacher also told senators the discussion of capital gains is not a back door to an income tax.
“We have no interest in talking about an income tax,” Schumacher said. “That’s why we chose the capital gains tax as our solution. It’s very different from a income tax.”