Sponsors say the idea behind the bill, which Senate Democrats have referred to as the “Fix Our Tax Code Plan,” is to direct revenue from the capital gains tax toward “tax reductions for less wealthy Washingtonians.”
“I think there’s general recognition that we’ve got a problem with our tax code,” Sen. Andy Billig, who brought forward the amendment, said in public hearing. “We’re 50th out of 50 states in tax fairness — dead last. And we’re first in so many ways in our state, and our tax code is one of the things that I think we’re probably least proud of. But, we can fix it.”
Under the bill, an 8.9% tax on capital gains in excess of $250,000 would be imposed starting on January 1, 2020. The tax would apply to the sale or exchange of property; exemptions from the tax include retirement accounts, livestock, timberland, affordable housing, and agricultural land.
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A few testifiers, including Jay Blumenthal, came forward in support of the tax as private citizens who would pay it. Blumenthal said he used to work at Microsoft, then worked as a teacher for a decade while profiting off his tech stock. He said he makes over $1 million per year from investments, without working, and hasn’t needed a paycheck for the last 20 years.
“We have this system where, if you have a lot of money — however you got it — it’s pretty easy to make more, and much of it in capital gains” Blumenthal said. “And I paid zero on these gains to Washington schools, Washington’s roads, Washington’s housing, its health care system… teachers, nurses, policemen, construction workers who didn’t win the tech lottery — they’ll pay up to six times what I pay in taxes to the state, which is totally unfair. So, we’re urging you to close this unnecessary tax break for the wealthy to balance our tax code and ask us to invest a little bit more in our communities.”
Testimony against the bill targeted the tax — or at least specific parts of it.
“The rhetoric and the reality are not the same,” said Patrick Connor, representing the National Federation of Independent Business.
The subject of some “con” testimonies was its potential impact on small businesses. There’s a provision in the bill that exempts sales or transfers of “qualified family-owned small businesses,” businesses that — among other qualifications — have employed fewer than 50 full-time employees and have had gross revenue of less than $5 million in the last year.
Mark Johnson of Washington Retail and other testifiers representing businesses stressed that the exemption leaves out too many small businesses.
“We still believe it will impact a significant number of retailers in Washington,” Johnson said. “These retailers work years, if not their entire lives, growing their business and employing local residents and contributing to their communities. This retail business is their retirement plan.”
Clay Hill, representing the Association of Washington Business, said the association preferred the Senate’s bill over the House’s proposal, since revenue goes toward tax relief rather than “using the funds to grow government.” However, he also pointed out several issues he has with the bill and said it should include a resolution for a vote of the people.
“Our position is the income tax is unconstitutional,” Hill said. “And I don’t see a Senate Joint Resolution accompanying this bill to put this before the voters. They should certainly have a say, given the number of times they’ve said no to an income tax.”
The Department of Revenue projects the tax would generate $642 million in the 2019-21 biennium and $1.563 billion in the 2021-23 biennium.
That money would fund the state Working Families Tax Credit; expand a business and occupation tax credit for small businesses; exempt feminine hygiene products, diapers, durable medical and mobility-enhancing equipment, and over-the-counter drugs from sales and use tax; and expand property-tax relief for senior citizens, individuals with disabilities, and veterans.
Many of the 28 testimonies in favor of the bill specifically mentioned the Working Families Tax Exemption. The Legislature established the state exemption, which is based on the federal Earned Income Tax Credit and aimed at people with low to moderate income, in 2008, according to the original bill’s staff analysis. It has never been implemented or funded.
“The Working Families Tax Credit, building off the federal EITC, is good for moms, good for families, and good for our economy,” said Maggie Humphreys, Washington State Organizer for MomsRising. “It is pro-work, pro-family, and one of the strongest tools we have for combating poverty…Researchers have found links between the EITC and improvements in infant and maternal health, better school performance for elementary and middle school students, as well as higher rates of college enrollment for students whose parents receive the EITC.”
After implementing the reductions, $49 million would be left over from the capital gains tax revenue and allocated to the General Fund at the end of the 2019-21 biennium, and $189 million would be left over at the end of the 2021-23 biennium.
The bill also reauthorizes the tax structure work group that was created in the 2017-19 operating budget. It includes a plan for the work group that runs through December 31, 2024 — the group is tasked with, among other directives, updating information in a report on the state’s tax structure from 2001, meeting with stakeholders, looking into the recommendations from last year’s work group, and making recommendations to the legislature.
Implementing and administering what’s included in the bill is expected to cost $9 million in the 2019-21 biennium and $7.3 million in the 2021-23 biennium, excluding the Working Families Tax Credit program. Implementing that program, according to committee staff, is expected to cost an additional $15-16 million per biennium.