Gov. Inslee’s 2021–23 budget proposal includes a capital gains tax, which has been introduced in the Senate as SB 5096. The bill will be heard by the Ways & Means Committee tomorrow.

SB 5096 would levy “an excise tax . . . on the sale or exchange of long-term capital assets.” The rate of the tax would be 9%. Long-term capital assets are defined as those held for more than a year.

The tax would not apply to capital gains under $25,000 for individuals and $50,000 for couples filing jointly. It would also not apply to capital gains from the sale of residential dwellings, retirement accounts, forced sales, livestock, agricultural and timber land, and property used in a trade or business. Additionally, sole proprietors would be allowed to deduct from the tax capital gains from assets used only for their business.

There would be a credit for out-of-state taxes, and a credit would be allowed against B&O taxes to avoid double taxation of sales or exchanges that would also be subject to the capital gains tax. The bill specifies that the B&O credit would first be applied to taxes that are deposited into the general fund. In the event that any credit reduces the revenues deposited in the workforce education investment account, “the state treasurer must transfer those amounts from the general fund to the workforce education investment account.” (This is related to the workforce education investment B&O tax surcharge enacted in 2019.)

The tax would be imposed beginning Jan. 1, 2022. The first returns would be due April 17, 2023. According to the fiscal note, state revenues would increase by $1.127 billion in 2021–23 and by $2.430 billion in 2023–25. The Department of Revenue assumes that about 58,000 taxpayers would pay capital gains taxes in 2023.

The governor’s office notes, “The actual amount collected will depend on fluctuations in the financial markets, and can be expected to vary from year to year. The state can manage these fluctuations through careful budgeting.”

Indeed, a capital gains tax would make Washington’s tax structure much more volatile, as we showed in a 2019 policy brief. To manage that volatility, the state would need to increase savings during boom times in order to better smooth out revenues through downturns. One good point about the governor’s proposal is that capital gains tax revenues would be deposited in the general fund–state. That means that collections would be subject to constitutionally-required transfers to the rainy day fund.

This is only the most recent of a long line of capital gains tax proposals. As we wrote in 2019, if the bill is passed, it will certainly be challenged as an unconstitutional income tax. Thus, it should not be relied on to balance the budget.

On top of that, a recent Crosscut/Elway poll found that just 41% of voters support a capital gains tax.