In January, Emily wrote about the capital gains tax included in Gov. Inslee’s budget proposal and introduced as SB 5096. On February 16, the Senate Ways and Means Committee passed substitute version of the bill, SSB 5096.
As passed by the committee, the tax rate is 7%, down from 9% in Gov. Inslee’s proposal.

In the committee-passed bill, the first $250,000 of capital gain is excluded from tax for each return, without regard to whether the filer is a single individual or a couple. Couples who file a joint federal return must file a joint state return. Couples who file separate federal returns must file separate state returns.

Gov. Inslee’s bill excluded the first $25,000 in gains for an individual return and the first $50,000 for a joint return.

With the lower tax rate and higher exclusion amount, SSB 5096 would raise significantly less revenue that would Gov. Inslee’s original proposal. There is as yet no fiscal note for SSB 5096. However, committee staff estimated that it would raise about $1.6 billion over the next two biennia, considerably less than the $3.56 billion projected for the original proposal.

Exemptions include:

• All real estate
• Various retirement savings plans for example IRAs, 401(k)s, 403(b)s
• Property sold because of a federal, state or local government condemnation proceeding
• Cattle, horses and breeding livestock used in farming or ranching
• Agricultural land in cases where the seller has been actively involved in its use
• Timber or timberland
• Depreciable property used in a trade or business
• Goodwill included in the price received in the sale of an automobile dealership
• “Qualified family-owned small businesses”

To qualify for the family-owned small business exemption, the taxpayer must have owned the interest sold for at least 8 years. The taxpayer or a family member must have “materially participated” in operating the business. The business must have no more than 50 full-time employees and annual revenue of no more than $6 million. At least 50% of the business must be owned by members of a single family, or at least 90% must be owned by no more than three families.

The bill declares the tax to be “an excise tax … on the sale or exchange of long-term assets” rather than an income tax on the profit realized from the sale. This is an attempt to evade a 1933 state supreme court decision that held income to be property and that therefore any tax on income must satisfy the constitutional requirements that property taxes must be uniform on any class of property and that the tax rate not exceed 1%.

If the tax is enacted, its constitutionality will surely be challenged in court. Some supporters of the bill are looking forward to the court challenge as an opportunity for the state supreme court to overturn its 1933 decision that income is property.