On I-2019, the possible repeal of Washington's income tax on capital gains

Washington voters will soon have an opportunity to have their say on an unusual and corrosive tax the legislature passed in 2021. The controversial tax imposes a levy of 7% on capital gains income over $250,000. While that seems like it would only apply to “the rich,” the legislature has already proposed expanding the tax until it hits working-class incomes.

Here’s how got where we are now. Three years ago, lawmakers passed and Governor Inslee signed SB 5096, creating the first-ever tax on capital gains income.

Based on multiple precedents from the Washington state supreme court, the law was unconstitutional. The state constitution bans a state income tax except under rare conditions. Democrats got around this provision by labeling the income tax as an “excise” tax. The state supreme court, in a split decision that overturned its own rulings, accepted this rhetorical maneuver.

In response, concerned citizens collected over 454,000 signatures to send Initiative 2109, which would repeal the capital gains income tax, to the legislature. Democratic leaders, fearing the initiative would receive a majority if legislators were allowed to vote on it, blocked the measure, saying they thought it would “cost” the state too much money. Their decision means the people get to vote on Initiative 2109 directly.

Prospects for passage look positive. A state income tax is highly unpopular in Washington. Income tax proposals have been defeated by voters ten times, most recently in 2010, when Washingtonians rejected it by a crushing 64%.

Opponents of Initiative 2109 say it would “result in the loss of revenue for the state,” would “reduce K-12 funding” and would “devastate” state programs.

Of course that’s not true. The state will not “lose” money under Initiative 2109. General Fund revenue is now $72 billion per budget. State tax revenue has doubled in the last 10 years, while inflation went up only 34%. It will continue to increase by billions of dollars every year under current taxes without the capital gains income tax.

Opponents threaten Initiative 2109 will “cut childcare” and make the “school funding crisis” worse. Neither statement is true. School funding, at $29 billion, is not in crisis and state social spending is at record levels and rising. In fact, public schools now spend over $19,000 per student, more than tuition at many private schools.

Lastly, opponents say that passing Initiative 2109 would shift “tax pressure to small businesses and working families, impacting Washington’s economy.”

This assertion is false. Initiative 2109 would cut taxes; it would not increase taxes on anyone. Cutting taxes on private investment helps small businesses grow and increase jobs. Taxes could go up only if lawmakers respond to voter approval of Initiative 2109 by increasing other taxes on middle- and low-income Washingtonians.

The capital gains income tax has already pushed jobs and investment out of the state. Shortly after SB 5096 passed, Fisher Investments, a firm with 1,800 employees and $197 million in assets, moved out of state. Similarly, in October 2023 billionaire Jeff Bezos relocated from Seattle to Florida, a state with no income tax. Financial analysts estimate the move saved him $600 million in capital gains income tax.

The loss of jobs and investment available to grow Washington’s economy is not surprising. Until recently, the Inslee Administration bragged to business owners that Washington state did not have an income tax, recognizing that this policy made our business climate more attractive. Now, the Administration has stopped using that argument and deleted it from the Department of Commerce’s business-recruiting web page. The result is that the state is losing jobs and business that might otherwise come here.

Known for cutting-edge innovation for over a century, Washington is losing its once-vaunted reputation as an exciting and bustling West Coast business center that attracts the best and brightest from around the world. By pushing policies like taxing successful capital investments state leaders now signal that Washington is a place to avoid for entrepreneurs seeking to relocate an existing business or start the next great company.

For Initiative 2109 there are only two possible outcomes. If it is defeated Washington will remain in the ranks of states with a form of tax on income. If the measure passes Washington will return to its long-standing tradition of having no state income tax.