Opinion

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News / Opinion / Columns

Donnelly: Capital gains tax is not needed

By Ann Donnelly

Published: June 6, 2021, 6:01am

On May 4, Gov. Jay Inslee signed a new capital gains tax into law. It creates a 7 percent tax on the sale of stocks, bonds, and other capital assets in excess of $250,000.

The measure exempts retirement accounts, real estate, farms and forestry, as well as some business owners. Large charitable donations in the same year may also provide a loophole. So, in addition to removing investment money from the private sector, and enlarging government, the capital gains tax will create a new source of billable hours for tax accountants and lawyers.

Lest we conclude only a small number of the “rich” will be impacted, the tax is estimated to impact 16,000 households by 2023, extracting $415 million from the private sector at a time when economic recovery is under way.

Introduced in January by Sen. June Robinson, D-Everett, as an excise tax, the effort had another purpose — to smooth the way toward a state income tax, consistently rejected by voters. Sen. Jamie Pedersen, D-Seattle, made the real intent plain in emails to constituents.

“The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.” (April 30, 2018)

“Adopting a capital gains tax is one of the best things we could do to help advance the possibility of an income tax in our state.” (Dec. 30, 2018)

“I feel hopeful that this case will open the door to a more significant overhaul of our tax structure.” (May 11, 2021)

As Pedersen explained, the case for this tax rests on the hope that an argument already rejected by previous Supreme Courts — that income is not property — will prove acceptable to today’s court. Two lawsuits argue that capital gains are income and income is property. If so, the capital gains tax cannot stand.

The new tax is punitive to businesses of all sizes, especially when combined with the Biden proposed federal tax on capital gains, which together would create a 50.4 percent capital gains rate for Washingtonians, among the highest in the nation.

Many businesses and individuals moved to Washington expressly to avoid taxation of income, which they doubtless believe includes capital gains.

“People save and invest for decades in order to put themselves in a stable financial position later in life,” observed Aaron With, CEO of Freedom Foundation, arguing that the measure brings “negative consequences for job creation, entrepreneurship and the (state’s) economy.”

All this would make slightly more sense if another source of tax revenue were urgently needed. It isn’t. Revenue collections to the state are robust, up by more than 10 percent this legislative term. Federal funds for COVID brought in $20 billion more in the past year.

The capital gains tax is deceptive, flawed, counterproductive, and unneeded. So why the effort this year? The COVID crisis contributed convenient urgency, but the state’s redistricting calendar may have played a greater role. Nov. 15 is the deadline for redrawing boundaries of legislative districts.

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