The House Finance Committee held a public hearing today on HB 2967 to create a capital gains income tax. Those who were able to make it to the hearing (I-90 was closed in the mountains due to heavy snow) were provided a lengthy 1 minute to testify. Before discussing the testimony provided let's take a quick tax pop quiz: How many states with no income tax have a tax on capital gains? Hint: It's the same number of states that have an excise tax on capital gains.

For those of you that guessed Zero, congratulations! (Note: Neither TN nor NH tax capital gains. They do tax interest, though TN is phasing out its Hall tax)

Among those testifying today was Jared Walczak, a Senior Policy Analyst at the Tax Foundation. Jared made the trip from D.C. to help provide national perspective on whether what is being proposed is an excise tax or an income tax. Trying to make those points in 1 minute is challenging so Jared also posted this series of tweets:

"Testimony is very brief today, so I focused my remarks on the legal question. WA constitution's uniformity clause essentially bars income taxes, so this is framed as an excise tax. But the proposed capital gains tax has none of the characteristics of an excise tax.

There’s a reason we often consider sales and excise taxes together: excise taxes are transaction taxes. Often ad valorem on cost of transaction (special sales tax), sometimes a single rate (think dollar-per-pack cigarette taxes). What they aren't: taxes on net income.

This tax isn’t on capital gains transactions or the privilege of buying and selling investment instruments. It is on the net of gains and losses over the course of a defined period. That is decidedly an income tax—on a narrow class of income, but an income tax nonetheless.

Courts tend to care about substance over form, and certainly nomenclature. Simply calling a tax on a class of income an excise tax doesn't change its fundamental character. It's imposed on the aggregate of net and losses over a year, not on transactions. That's income." 

Several individuals who testified in favor of the new tax said it was time to close the "tax break" on capital gains. I've repeatedly asked these individuals for help understanding this talking point since I've searched and searched the RCWs to find the "tax break" on capital gains and can't find it. The only thing I can find are the 6 constitutional amendments and 4 ballot measures imposing an income tax that the voters have rejected.

Thankfully one member of the Finance Committee helped point me in the right direction with this tweet: 

"It's in the section right after the tax exemption on breathing."

Also testifying in favor of the capital gains income tax were WEA, WFSE and SEIU. These unions all made it clear, however, that while they want a capital gains income tax they don't want any new revenue to result in tax cuts elsewhere. After hearing state unions argue for a capital gains income tax but against using it for tax relief, I'm just shocked voters don't trust proposals to create new taxes with the promise of other tax relief.

This point brings to mind the actual policy details of HB 2967. Though a promise of property tax relief, those cuts wouldn't take effect until 2021. With that in mind here is my summary of the bill: Lawmakers will gladly cut your property taxes in 2021 for a capital gains income tax today.

It is worth noting that the Tax Foundation and WPC aren't the only policy groups making the point that a capital gains tax is an income tax. Consider this April 24, 2017 email from John Burbank, Executive Director of Economic Opportunity Institute, uncovered via public records concerning Seattle's income tax effort (available on request):

"The tax on capital gains is being portrayed (wrongly, I think) as NOT a tax on income, but as an excise tax."

With yesterday's state revenue forecast showing a massive increase in revenue it is surprising the House Finance Committee is still even considering imposing a capital gains income tax. As of today HB 2967 is still scheduled for executive action on Monday (2/19).