When is a capital gains tax not considered an income tax? The answer is “never,” no matter how advocates try to dress it up as something else.
The state constitution says that property must be taxed at a uniform rate, and the state Supreme Court has ruled repeatedly that income is property. In addition, voters have five times rejected constitutional amendments to allow a graduated income tax, and four times they have rejected proposals to call an income tax an “excise tax.”
Because of this history, income tax supporters are trying once again to sell the people an income tax wrapped up in excise tax clothing. The current effort, creating a capital gains tax, is included as part of the House Democrats’ $3 billion tax proposal for their 2017-19 budget.
Much like the children’s story about the emperor having no clothes, however, attempts to call a capital gains tax an excise tax is a naked attempt to hide the truth from voters. It is simply an income tax. But don’t take my word for it. Instead let’s see how state revenue officials across the country describe capital gains taxes.
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I contacted the departments of revenue of all fifty states, asking how they treat capital gains. In every case, revenue officials reported that they consider a tax on capital gains to be an income tax. In a few instances, state revenue officials actually laughed at my question, because they thought the answer was obvious.
Those states that tax capital gains do so through their income tax codes. No state taxes capital gains as an excise tax. States without income taxes described their treatment of capital gains income similar to the way Florida officials did: “There is currently no Florida income tax for individuals and, therefore, no Florida capital gains tax for individuals.”
The best response describing the difference between an excise tax and an income tax was provided by Illinois: “Capital gains are included in federal taxable income, against which Illinois income tax is determined. Illinois does not impose an excise tax on any form of income. Excise taxes are imposed on items of consumption, such as the liquor tax, cigarette tax and utilities taxes.”
Supporters in our state will say, however, that they are proposing an “excise tax” on capital gains much like the state Real Estate Excise Tax (REET). The REET tax applies to the sale price of the home whether or not there are any gains or losses. The REET taxes a transaction, not profits. Should lawmakers want to impose a tax on the transaction of selling stock, that would be an excise tax. The excise tax would apply even if the seller lost money.
As the IRS and all state revenue departments explained, however, taxing only the profits on selling capital investments is an income tax.
Further illustrating this point is the actual text of the bill this year proposing the tax on capital gains. House Bill 2186 says capital gains “means the net long-term capital gain reportable for federal income tax purposes.” In fact, a different section of HB 2186 requires those subject to the new capital gains tax to send a copy of their federal income tax return to the state.
Capital gains tax proponents say the court gives great “deference” to lawmakers when defining what a tax is. They say that if the tax is called an “excise tax” then that is how the court will view it.
Not likely. Twice before lawmakers have attempted to call an income tax an excise tax. Both times the state Supreme Court rejected this argument and struck down the tax. The justices said, “The character of a tax is determined by its incidents, not by its name.”
When faced with the fact all states consider capital gains as income and those that tax it do so as income taxes, the “incidents” of the tax will be clear.
If supporters of a capital gains tax really believe in their idea, they should call it what it actually is — an income tax — and not play word games. Of course, the fact the courts have repeatedly struck down graduated income taxes and the voters have rejected them nine times may be why the “excise tax” label game is being played in the first place.
Jason Mercier is the Government Reform director for Washington Policy Center, a non-profit, non-partisan research organization with offices in Tri-Cities, Spokane, Seattle and Olympia. Online at washingtonpolicy.org