Cancel your weekend plans. The income tax on capital gains (SB 5096) has been scheduled for a vote by the full Senate on Saturday. I am truly stunned that the Senate is poised to ram thru an income tax before what everyone expects to be a large increase in the March 17 Revenue Forecast. The budget process has been turned upside down.

Discussing the rushed vote to impose an income tax a Seattle Times editorial says:

“Washington Democratic Senate leaders should think twice before voting on a capital-gains tax proposal likely destined for the courtroom. Slow way down. This bill is oddly being rushed to a floor vote ahead of a promising new revenue forecast report.”

Despite irrefutable evidence from the IRS and every other state revenue department, supporters of this tax refuse to call it an income tax. They insist they have discovered a way to tax capital gains income that no other tax professional in the world is aware of – as an excise tax.

What does the actual text of the striker amendment for SB 5096 say? Follow the capital gains income tax bouncing ball:

• "Only individuals are subject to payment of the tax, which equals seven percent multiplied by an individual's Washington capital gains."
   
• "'Washington capital gains' means an individual's adjusted capital gain less $250,000, as adjusted annually under section 115 of this act, for each return filed under this chapter."
   
• "'Adjusted capital gain' means federal net long-term capital gain"
   
• "Federal net long-term capital gain" means the net long-term capital gain reportable for federal income tax purposes"

Did you track all of that? The tax doesn't apply to the sale of an asset (an excise tax), but instead is imposed on the income reported to the IRS.

This is what is known across the country as an INCOME TAX.

The State Supreme Court has repeatedly ruled that it doesn’t matter what the Legislature calls a tax when determining if it is constitutional. From one of the court’s income tax rulings:

“But the legislative body cannot change the real nature and purpose of an act by giving it a different title or by declaring its nature and purpose to be otherwise, any more than a man can transform his character by changing his attire or assuming a different name. The legislature may declare its intended purpose in an act, but it is for the courts to declare the nature and effect of the act. The character of a tax is determined by its incidents, not by its name.”

As noted by former State Supreme Court Justice Phil Talmadge:

“Again, the Supreme Court indicated that legislative labels for a tax are not controlling: We have no hesitancy in saying that an analysis of the present act convinces us that the tax is a mere property tax 'masquerading as an excise.'"

The State Supreme Court in 1960 again made this clear when refusing to hear an income tax challenge:

"The argument is again pressed upon us that these cases were wrongly decided. The court is unwilling, however, to recede from the position announced in its repeated decisions. Among other things, the attorney general urges that the result should now be different because the state is confronted with a financial crisis. If so, the constitution may be amended by vote of the people.”

If supporters of this tax truly believe it is an “excise tax” and aren’t instead trying to set up a lawsuit to open the door to a broad-based graduated income tax without a constitutional amendment (as public records show is the goal), they should gladly accept this proposed amendment before passing the bill:

“The legislature recognizes well established state supreme court precedent declaring income to be property. The legislature also recognizes the fact that state voters have rejected six income tax constitutional amendments. If the capital gains tax under this act is challenged in court, the state attorney general is prohibited from requesting the court to reconsider its prior rulings declaring income to be property.”

Failure to adopt this amendment will leave no doubt what the true motivations are for imposing this tax despite a balanced budget and growing revenues.

Additional Information
Editorial coverage of capital gains income tax proposals
WA Capital Gains Income Tax Proposal: What You Need to Know!
A Capital Gains Tax IS an Income Tax: Irrefutable Proof in About Two Minutes (short video)
BAD POLICY: An Income Tax on Capital Gains for Washington (short video)