Jay Inslee advocated a state capital gains income tax to help fund his proposal to increase the budget by 15% over the next two years – to $39 billion. It’s one of the many ways he has broken the no-new-taxes campaign promise he made in 2012. Many Democrats in the state Legislature – mainly from Seattle – eagerly backed Inslee’s new tax proposal because, after all, support for a state income tax is a guiding principle of the state Democrat Party.
Inslee and his fellow Democrats refer to the state capital gains income tax as a means make our state’s tax system “fair.” They describe it as an “excise tax.” Of course, a capital gains income tax is not an excise tax. It is a tax on income. But, a state capital gains income tax is likely unconstitutional and would not be a reliable source of revenue according to the Washington Policy Center,
“Under the state constitution, property cannot be taxed at a rate greater than 1 percent and the taxes must be uniform. The state Supreme Court has repeatedly ruled that “income” is property and that taxes on income must conform to the 1 percent limit.
“The fiscal note for House Bill 1484 assumes that litigation against the proposal will occur. According to the fiscal note:
“We assume that because the capital gains tax is a new tax actions challenging its constitutionality will be filed in Superior Court . . . We assume up to five Superior Court actions will be filed challenging the constitutionality of the capital gains tax and that such court challenges will be filed after the effective date of the capital gains tax, which is January 1, 2016.”
“Although the governor hopes to prevail against these legal challenges by describing his capital gains tax as an “excise tax,” it is arguably an income tax…”
The unconstitutionality of a state capital gains income tax isn’t the only problem with the tax, as Shift has reported. The tax is extremely volatile, and therefore is unreliable source of revenue. The Washington Policy Center,
“When releasing his tax-increase budget plan Governor Inslee said, ‘We have a very solid, fiscally sound, secure and stable way of financing everything I’ve talked about today.’
“The volatile history of capital gains taxes in other states, however, shows this form of taxation does not provide a “very solid, fiscally sound, secure and stable way of financing” ongoing government services. Here are comments of notes from across the country about capital gains taxes:
“California’s Legislative Budget Office (LAO) says: ‘Probably the single most direct way to limit the state’s exposure to the kind of extreme revenue volatility experienced in the past decade would be to reduce its dependence on the source of income that produced the greatest portion of this revenue volatility—namely, capital gains and perhaps stock options.’ …
“Standard & Poor’s said in a national report, ‘State tax revenue trends have also become more volatile as progressive tax states have come to rely more heavily on capital gains from top earners.’
“Standard and Poor’s also recently reviewed Governor Inslee’s proposal: ‘In particular, the governor’s proposal to impose an excise tax on capital gains could run into political opposition; therefore, it represents a source of risk to the budget since it accounts for over half of the revenue proposals.”
We will find out whether or not Democrat lawmakers will move forward with at state capital gains income tax in a week, as the state House is scheduled to introduce its 2015-17 budget next Monday. However, if the comments of Democrat Rep. Ross Hunter are any indication, it is likely the House budget will include a state capital gains income tax.
Check out the Washington Policy Center’s new report on the state capital gains income tax here.