With the new year comes the opportunity for a fresh start and the hope for better things. Based on a recent email with a state Senator who is advocating for a capital gains income tax, that may also include the legislature finally being ready for a more honest debate on the tax proposal. Now that the state Supreme Court has ruled that lawmakers must comply with our public records law, last week I sent select lawmakers a records request asking for the following:

“All records (emails, memos, etc.) discussing what type of tax a capital gains tax is - whether it is an excise tax or income tax. I am not looking for bill reports or bill drafts but instead any records between other lawmakers, the executive branch, or stakeholders.”

When acknowledging my records request, I had a friendly exchange with Sen. Joe Nguyen (D-34) about the capital gains income tax. The Senator recently wrote an op-ed calling on the Legislature to adopt a capital gains income tax this session.

Here is some of our exchange (shared with permission):

• Me: “Trying to learn what information lawmakers have that leads to the description of a capital gains tax as being an ‘excise tax.’ Every tax authority across the country, including the IRS, is in agreement that taxes on capital gains are income taxes.”
   
• Sen. Nguyen: “I don't recall any conversations between me and other members about why cap gains should be defined as an excise tax but we'll send over anything we can find. But personally, if cap gains is the same as income then they should have the same tax rate. Since we don't have corporate income taxes in Washington state there wouldn't be much of an issues on double taxation on the same source of earnings. I suspect you disagree but really do appreciate the advocacy work you're doing. I think more people involved should be diving deeper into the issue. At the end of the day we'd need a supreme court ruling to definitively answer this question.”
   
• Me: “I’m personally partial to this 1960 ruling from the State Supreme Court on this.”
   
• Sen. Nguyen: “I didn’t make it clear in my last email but I agree with you that cap gains is income. That’s why I’ve proposed other mechanisms that are more defensible. Although there is still an option for a 1% rate on cap gains that is constitutional.”

This exchange makes me hopeful about this tax debate going forward. If we can all operate from the same facts, the citizens are better served.

As the Washington state Department of Revenue previously warned (emphasis used by DOR):

• "The IRS considers taxes on investment income (dividends, a tax on net gains from the sale or exchange of a capital asset, or tax on the net taxable income of an unincorporated business) an income tax"; and
   
• a capital gains tax is “susceptible to constitutional challenge as an income tax prohibited by the Washington state constitution.”

Speaking directly about this the IRS said:

“You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such."

There is no debate about this anywhere outside of Washington state. Based on the emails with Sen. Nguyen, we may finally be able to move forward in agreement that capital gains are in fact income.