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It was only a matter of time.
In the wake of the Washington State Supreme Court upholding a capital gains income tax as an excise tax, Seattle Councilmember Alex Pedersen has introduced one for the City of Seattle.
The measure would impose a 2% capital gains tax on city residents. It follows the state capital gains tax collection method by taxing gains over $250,000 of stocks and bonds. It also exempts retirement funds and some real estate transactions. You can find the summary here. The capital gains tax is being proposed to replace a water tax that the city currently levies. A separate measure was filed by Councilmember Pedersen.
Councilmember Pedersen claimed that this is tax neutral but per the fiscal note, the water tax would generate $39 million in FY 2025 while the capital gains tax would raise an estimated $50-$60 million.
Setting aside the Constitutional question of a capital gains excise tax, the collection of such taxes is highly volatile. This report highlights California’s trouble with setting budgets on capital gains taxes. It is safe to assume that the City of Seattle would face similar issues with its capital gains tax.
There is a whole host of other programs this tax faces. We have seen individuals move their businesses out of state over the capital gains tax. Imagine how much easier it is for individuals to move cities.
Then there is the Constitutionality of the tax itself. While the Washington State Supreme Court has upheld this tax, there are certainly additional legal challenges ahead. Another option could be a citizen’s initiative to repeal the capital gains income tax. The future of a capital gains income tax in Washington State is not guaranteed.