When Jay Inslee introduced his proposal to increase the budget by 15% over the next two years (to a whopping $39 billion), he advocated a state capital gains income tax to help fund his proposal. It’s one of the many ways he has broken the no-new-taxes campaign promise he made in 2012. When it came state House Democrats turn to propose their budget, they eagerly backed Inslee’s new tax proposal. Their eagerness came at no surprise because, after all, support for a state income tax is a guiding principle of the state Democrat Party.
Inslee and his fellow Democrats advocate for the state capital gains income tax using descriptive language that could not be further from the truth. They refer to the tax as a means make our state’s tax system “fair” (check out why that’s not true here). And, they describe the tax as an “excise tax.” Of course, a capital gains income tax is not an excise tax. It is a tax on income.
Democrats—particularly Jay Inslee—and their special interest supporters are quite upset with Republicans and other business-friendly groups calling a capital gains tax what it is: an income tax. As Shift has done, these groups are using the phrase “capital gains income tax” to better describe the tax.
It’s unclear why it is so difficult for Inslee and Democrats to accept reality. After all, the Internal Revenue Service (IRS) classifies a capital gains income tax as a tax on income. Additionally, the United States Supreme Court has ruled that capital gains are taxable as income.
But that’s not all. States with income taxes also classify capital gains as a form of income. Oregon categorizes its capital gains income tax under “personal income tax.” Idaho classifies it as an “individual income tax.” And, New Jersey lists it as an income tax stating, “If you are a New Jersey resident, all of your capital gains, except gains from the sale of exempt obligations, are subject to this State’s income tax.”
The reality is the Inslee and his Democrats need it to be an excise tax in order for the tax to be legal. Under the state constitution, property cannot be taxed at a rate greater than 1 percent and the taxes must be uniform. Additionally, the state Supreme Court has ruled—time and time again—that “income” is property and that taxes on income must conform to the 1 percent limit.
If Democrats get their way and the state Legislature passes a state capital gains income tax, the state Supreme Court would ultimately rule on whether or not it is constitutional. In that case, the court will either strike the tax for being unconstitutional or it will strike 80 years of precedent finding income is property. In the first case, the court will consequently deliver a blow to McCleary funding in the budget. In the second, the court will consequently end the state’s prohibition on taxing all forms of income uniformly. No doubt, it’s the latter Democrats are hoping will happen.