A new Washington State law, SB 5096, signed on May 4th, would levy an excise tax on “certain capital gains.” Here’s how Laurel Demkovich described the measure in a May 10 Spokesman article:
It implements a 7% tax on the sale of stocks, bonds, businesses and other investments if the profits exceed $250,000 annually. Exceptions include the sale of all real estate, livestock and small family-owned businesses.
It’s expected to bring in about $415 million for the state to pay for child care and early learning. Revenue would start coming in 2023.
Four hundred and fifteen million is a big number by itself, but $415 million in collections at a tax rate of 7% means that the amount taxed would be close to $6 billion. That $6 billion dollars in long term capital gains not counting real estate (any real estate, including your home or the family farm), not counting family owned businesses with annual revenues less than ten million dollars, not counting gains accrued in retirement accounts, and not counting any other gains that do not exceed $250,000. It astounds me that with all those exceptions there remains $6 billion dollars of capital gains among individuals and couples in the State of Washington to which to apply the tax. This tax will apply only to the wealthiest of the wealthy and even then it will apply primarily to massive profits made dealing in financial instruments.
How will the money derived from this tax be used? Ms. Demkovich in the Spokesman article gives scant attention to the purpose of the tax: “It’s expected to bring in about $415 million for the state to pay for child care and early learning.” Ms. Demkovich might better have quoted the law as passed (the bold is mine):
To help meet the state's paramount duty, the legislature intends to levy a seven percent tax on the voluntary sale or exchange of stocks, bonds, and other capital assets where the profit is in excess of $250,000 annually to fund K-12 education, early learning, and child care, and advance our paramount duty to amply provide an education to every child in the state. The legislature recognizes that levying this tax will have the additional effect of making material progress toward rebalancing the state's tax code.
That paramount duty to provide ample funds with which to educate our children is enshrined in the Washington State Constitution (Article IX, Section 1).
The law as passed is also clear about the lack of fairness in our state tax system:
Washington's tax system today is the most regressive in the nation because it asks those making the least to pay the most as a percentage of their income. Middle-income families in Washington pay two to four times more in taxes, as a percentage of household income, as compared to top earners in the state.
It is the right thing to do. If you’re going to live in Washington State and enjoy the benefits of an educated citizenry and workforce one ought to be willing to chip in to fund that education. The wealthiest among us have benefitted the most from this educated workforce. We currently fund education through a maze of regressive taxes, so this new slightly progressive tax is a done deal, right? Not so fast.
The conservative group Freedom Foundation, along with the Seattle-based law firm Lane Powell, filed a lawsuit on April 28 seeking to overturn the capital gains tax.
A lawsuit on what basis? In 1930, the Washington State Constitution was amended1 (the footnote is a copy of that amendment) to read, “All taxes shall be uniform upon the same class of property.” That Amendment 14, however it was passed and for whatever purpose at the time, has been used ever since as a legal argument to claim that an income tax is unconstitutional (from the perspective of the state constitution). The “Freedom Foundation,” funded by the wealthiest of the wealthy, will, no doubt, take this all the way to the Washington State Supreme Court over the issue of whether this new capital gains tax is prohibited under Amendment 14. (This amendment has been used to claim an income tax is “unconstitutional” ever since its enactment.) It will all come down to whether this nearly century-old amendment is interpreted by the nine justices of the Washington State Supreme Court can see this new tax as an excise tax (as the law states) versus a tax that is unconstitutional based on Amendment 14.
Amendment 14 was passed by the legislature in 1929 and sent to the voters in the 1930 general election. The 1930 voters pamphlet argument in favor of its passage certainly suggests there was no intent to include capital gains on stocks and bonds as “property” for the purposes of the amendment:
Under the proposed amendment it will be possible to tax bonds and stocks other than those secured by or representing property taxed in this State, at moderate rates, leaving them still desirable as investments.
One hopes that the justices will refer to the voter’s pamphlet (the link to which I found here). How legislators marketed Amendment 14 to the public surely must speak to their intent.
Brace yourselves for the onslaught from the Washington Policy Center and other Republican anti-tax outfits funded by wealthy conservatives. Fully expect to hear that this new tax must be struck down because it is the beginning of a “slippery slope” that will end in the government taxing everyone’s meager income.2 They will strictly avoid discussing how the wealthy have avoided paying their fair share in this state for at least a century.
Keep to the high ground,
Jerry
Amendment 14 (1930) — Art. 7 Section 1 TAXATION — The power of taxation shall never be suspended, surrendered or contracted away. All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership. All real estate shall constitute one class: Provided, That the legislature may tax mines and mineral resources and lands devoted to reforestation by either a yield tax or an ad valorem tax at such rate as it may fix, or by both. Such property as the legislature may by general laws provide shall be exempt from taxation. Property of the United States and of the state, counties, school districts and other municipal corporations, and credits secured by property actually taxed in this state, not exceeding in value the value of such property, shall be exempt from taxation. The legislature shall have power, by appropriate legislation, to exempt personal property to the amount of three hundred ($300.00) dollars for each head of a family liable to assessment and taxation under the provisions of the laws of this state of which the individual is the actual bona fide owner. [AMENDMENT 14, 1929 p 499 Section 1. Approved November, 1930.]
Observe that the same “slippery slope” argument is used in various forms in the controversy over gun regulation: any registry, any control over gun sales, is immediately posed as the top of a “slippery slope” that will end in the government regulating not just military weaponry but confiscating your hunting rifle! The “slippery slope” argument ought, by now, to be wearing a little thin…