Capital Gains Tax Bill Narrowly Passes Washington Senate

WASHINGTON — A bill to create a capital gains tax for some of Washington's highest earners has narrowly passed the state Senate.

Lawmakers approved the proposal, Senate Bill 5096, on a vote of 25 - 24 after more than three hours of debate Saturday.

Though the bill was triumphant and is moving forward for consideration by the House, analysts warn it is not out of the woods yet: even if it does pass the House and receives the governor's signature, both critics and supporters of the tax say to expect a lawsuit on the issue.

As Crosscut's Melissa Santos explains, the bill would apply a 7 percent tax on all capital gains over $250,000 per year. Anything less would be exempt, as would home sales and other real estate transactions.

An earlier version of the tax, proposed by Gov. Jay Inslee, would have applied a 9 percent tax rate and would have raised $1.1 billion in 2023 and more than $2.4 billion between 2023 and 2025. Inslee celebrated the bill's passage over Twitter Saturday.

Supporters estimate the bill would impact less than 10,000 Washington homes — about 1.9 percent of households, with an average income of over $750,000 a year — but would raise hundreds of millions for other projects.

"It's asking that small group of people to join us in building our quality of life," said Sen. Reuven Carlyle (D - Seattle)

The bill has faced strong opposition from Republicans, who say it will punish high earners for living in Washington.

"The rich leave and now what do you do?" asked Sen. Jeff Wilson (R - Longview) during the bill's hearing.

Critics also argue that the proposal verges on being an income tax, which would make it illegal under the state constitution. The bill itself refers to it as an "excise tax on gains" which supporters believe makes it legally distinct from an income tax.

The lack of an income tax option is one of the reasons the governor pushed the capital gains tax in the first place. A common phrase when talking about taxes in the Evergreen State is that Washington has "the most regressive taxes in the country," something the governor touched on in his proposal earlier this year:

The governor supports adding a capital gains tax in Washington in large part because it won't make the state's upside down tax system even more regressive. Under Washington's tax system — the most regressive in the country — the poorest households pay nearly 18% of their income in taxes, compared to just 3% for the very wealthiest households.