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Intentions lay bare on capital gains income tax bill

Opinion, One group’s 2-minute take on capital gains taxes

The Washington Policy Center's 2-minute argument that a capital gains tax is an income tax.
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The Washington Policy Center's 2-minute argument that a capital gains tax is an income tax.

It is the final official week of the 2019 legislative session and lawmakers are meeting behind closed doors finalizing the 2019-21 budget and tax increases.

Thanks to recent committee action on the proposed capital gains income tax (HB 2156), we now know the real goal behind the proposal is to allow a graduated state income tax without a constitutional amendment.

Last Friday, on a party-line vote, the House Finance Committee rejected an amendment proposed by Rep. Brandon Vick, R-Vancouver, to prohibit the attorney general from asking the state Supreme Court to allow a graduated income tax without a constitutional amendment.

His amendment read: “The legislature recognizes well established state supreme court precedent declaring income to be property. The legislature also recognizes the fact voters have rejected six income tax constitutional amendments. If the capital gains tax is challenged in court, the state attorney general is prohibited from requesting the court to reconsider its prior rulings declaring income to be property.”

Discussing his amendment Rep. Vick said it’s “a straight-face test amendment: this bill is what the Legislature says it is, and you have to defend it as such.”

Supporters of the income tax on capital gains have maintained that despite what the Internal Revenue Service and every other state in the country say about this type of tax (including the actual text of the bill), they believe it is an “excise tax.” Rep. Vick’s amendment would have required the attorney general to defend it solely on that argument and not try to overturn nearly a century of caselaw from the state Supreme Court declaring income to be property.

Encouraging the rejection of the amendment, however, the Chair of House Finance Gael Tarleton, D-Seattle, said: “I don’t want to predict what would happen, and I also don’t want to assume that we know what the outcome … might be right now. I just want to ensure that we are not undermining the authority of this legislature to develop policy regarding the taxes of our state.”

By refusing to adopt this amendment, it is clear supporters of the income tax on capital gains are trying to set up a lawsuit in hopes judges will do what voters won’t and overturn nearly a century of case law prohibiting a graduated income tax. As noted by the amendment, voters have already rejected six constitutional amendments to overturn these prior court rulings.

Though disappointing, this is not a surprise. Earlier this year several Democratic lawmakers filed an amicus brief in the Seattle income tax case asking the court to overturn nearly a century of case law prohibiting a graduated income tax without a constitutional amendment.

Speaking of the illegal Seattle income tax, we know now thanks to a public records lawsuit settlement that the Seattle City Council was told by its own attorneys in 2014 that a local income tax was illegal under state law and the state constitution. Despite this the City Council unanimously approved a local income tax in 2017 in hopes of setting up a lawsuit. That illegal tax was immediately invalidated by King County Superior Court. The case is currently scheduled for a hearing in Division 1 Court of Appeals on June 6, 2019.

Just like the City of Seattle, supporters of the capital gains income tax are also trying to set up a lawsuit hoping to bypass voter opposition to income taxes.

The courts should not be used to circumvent the people on income taxes. As state Supreme Court Justices told lawmakers in an unanimous 1960 ruling, they needed to first ask voters to amend the state constitution if they want to impose a graduated income tax.

In related news, the House Finance Committee and House Appropriations committee also rejected an amendment relating to the new tax structure study proposed by HB 2157. That amendment would have added historical context concerning voters’ consistent actions rejecting income tax proposals.

The amendment read in part: “The legislature finds that while considering potential modifications to the tax code, the legislature should be mindful of the people’s history of rejecting all forms of income tax, resoundingly. On ten separate occasions, Washington voters have voted down income tax proposals . . . Additionally, the work group must uphold the will of the people and not recommend any form of income tax.”

By rejecting these amendments, it is clear some lawmakers want the courts to do what voters won’t. Whether or not Washington has an income tax is a decision the voters should make through a constitutional amendment, not as a result of tax mischief from elected officials trying to set up lawsuits.

Jason Mercier is the Government Reform director for Washington Policy Center, a non-profit, non-partisan research organization. Online at www.washingtonpolicy.org

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