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Capital gains: The emergency clause, the voters and the courts

During Saturday’s vote in the Senate, the capital gains tax legislation sponsored by Sen. June Robinson faced nineteen floor amendments.

While only three amendments passed, none was more consequential than Sen. Steve Hobbs’s amendment 413, which removed the emergency clause from the underlying bill.

It was a simple amendment, having a seemingly straightforward effect:

Removes the emergency clause. Removes language from the intent section specifying that the tax is necessary for the support of state government and its existing institutions.

But, the impact was more profound — for political, electoral and legal reasons.

First, the political. I’m told this clause was “a red line” for some members in the Senate Democratic Caucus. If it stayed in the bill, they would vote no. If it came out of the bill, it had a chance to get to 25 votes.

So, what was the big deal with this clause anyway? Why was the emergency clause in there and what was all the fuss about it?

Sen. Hobbs offered his thoughts during the floor vote.

I think there are times when you need an emergency clause, but in this case, Mr. President, this act does not take effect for two years so really not an emergency.

If legislation is considered an emergency piece of legislation, and includes a clause such as the one removed over the weekend, then there are a handful of things that are allowed in the legislation that would not apply otherwise.

In this case, the relevant question is whether the legislation could go to a referendum vote of the people. That is prohibited in emergency legislation.

So, with this emergency clause included, and the reason it may have been a “red line” for some members, voters could not be given the question of review of this bill at the ballot this fall via a referendum.

With the emergency clause removed, a referendum movement could mobilize. If that movement collects 4% of the signatures of the last gubernatorial election, or about 165,000 signatures, then the referendum would move to the November ballot in 2021.

That’s where electoral considerations come in. Going to a review of the voters is a precarious option. In 11 instances of some income tax question on the ballot since 1932, the voters have turned down the option to tax themselves in every instance. The most recent instance was in 2010.

With SSB 5096 over in the House now, I’m told that some members of that chamber are pushing to put the emergency clause back in the bill.

If that emergency clause remains, a referendum would not be possible.

An initiative would be possible, however. That’s the act of the people legislating for themselves, working directly rather than through the legislative process.

To bring an initiative to the ballot requires more work, and often more time. It requires double the number of signatures — 8% of the vote count from the previous gubernatorial election. That amount probably puts the question of an electoral action into 2022, though that’s a practical limitation rather than a legal one.

And that’s where the legal considerations come in.

Remember that a primary benefit of this bill among some Democratic strategists is to get this question into the courts with the goal of having the Washington State Supreme Court review the precedent defining income as property.

Sen. Jamie Pedersen laid out this rationale in a 2018 email.

But the more important benefit of passing a capital gains tax is on the legal side, from my perspective. The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.

Since our state Constitution prohibits taxing property at differentiated rates, as in a progressive income tax, and prohibits such rates at being greater than 1% without a vote of the people, the current precedent of considering income as property means a progressive income tax is unconstitutional.

That is the case, at least until the Supreme Court changes precedent.

So, if this capital gains bill is enacted, Democrats want a legal challenge to get into the courts. They want an injunction to be filed as part of a grander strategy on fiscal policy.

The inclusion of an emergency clause makes that court challenge more likely to happen.

If the capital gains tax passes without an emergency clause, and a referendum is filed within 90 days of passage, arguably no lawsuit by opponents would be necessary. The will of the voters could, the thinking goes, overturn the capital gains tax, and that would be that.

If SSB 5096 passes with an emergency clause, the time the question would need to get to the voters would arguably be into 2022 to have a voice on this issue.

During that time, opponents may have no choice but to bring this question to the courts if they wanted to stop the tax from moving forward.

And, once it’s in the courts, perhaps progressives’ long sought uncoupling of income from property could finally pass, so as long as voters don’t pull the rug out from underneath the strategy.

So, whether this bill is an emergency or not depends on how one looks at it, a point on which reasonable minds can disagree. What is clear, however, is that the question of whether the bill is an emergency has both electoral and legal implications in the months ahead.

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