Jason Mercier: Yes Virginia, a capital gains tax is an income tax

The Governor recently released his 2018 supplemental budget. In a minor Christmas miracle, it didn’t include a capital gains income tax (though it did include a carbon tax and spending from the emergency reserves). Why was the lack of a capital gains income tax in his budget a surprise?

The Governor has previously strongly supported a capital gains tax despite repeatedly saying he is opposed to an income tax. This disconnect reminds me of this short note I recently received:

Dear Jason,

Some of my elected friends in Washington say a capital gains tax isn’t an income tax but instead an excise tax. Please tell me the truth, is a capital gains tax an income tax?

Virginia

Here was my reply:

Virginia, your elected friends are wrong. They have been affected by years of failing to impose a statewide income tax. They do not believe they can win a fair tax fight so they are attempting semantical gymnastics to try to avoid asking the voters to approve a constitutional amendment.

Yes, Virginia, a capital gains tax is an income tax. But don’t take my word for it. Every state revenue department across the country says so, including the taxmen toiling in the IRS workshop (not to mention, the Commonwealth of Virginia).

Don’t believe a capital gains tax is an income tax? You might as well believe Seattle has the authority to impose a local income tax.

While it is encouraging to see the governor decide for now to pass on a capital gains tax, it is likely this fight will continue in the future.

Why does this matter?

A couple of reasons. First, a graduated income tax in Washington requires a constitutional amendment. Second, a capital gains tax is notoriously volatile and will cause large swings in revenue. And finally third, as noted by state officials, adopting an income tax will throw away one of Washington’s “competitive advantages” of being a non-income tax state.

This is why it is important to remember, a thousand years from now, Virginia — nay 10 times 10,000 years from now — a capital gains tax will still be an income tax.

This story was originally published December 23, 2017 at 1:24 PM with the headline "Jason Mercier: Yes Virginia, a capital gains tax is an income tax."