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The following is presented as part of The Columbian’s Opinion content, which offers a point of view in order to provoke thought and debate of civic issues. Opinions represent the viewpoint of the author. Unsigned editorials represent the consensus opinion of The Columbian’s editorial board, which operates independently of the news department.
News / Opinion / Columns

Jayne: Capital gains tax right thing to do

By Greg Jayne, Columbian Opinion Page Editor
Published: September 19, 2021, 6:02am

It’s a good way to make a living – if you can afford it.

A recent report from the Economic Innovation Group – a Washington, D.C., think tank – finds that residents of King County earned an average of $24,100 in 2019 from their assets. That is not money from sweat and toil; it’s money from things such as stock dividends, interest payments and rental income. You know, wealth without working.

The study looked at the 100 most populous U.S. counties (Clark County is slightly outside the top 100) and used IRS data to determine how much money is derived from investments rather than production. King County ranked eighth among those 100 counties in terms of asset income per capita.

Of course, the thing about think tanks is that you never know what they are thinking before they begin a study; often, such explorations start with an answer in search of a question. The Economic Innovation Group was launched in 2015 by a group of entrepreneurs and professes to focus on “empowering entrepreneurs and investors to forge a more dynamic U.S. economy.”

So, take that for what it’s worth. The point is that the findings about King County – home to Amazon, Microsoft and thousands of Boeing workers – is intriguing. The guess is that most residents earn nowhere near $24,100 in asset income, but there are enough people who can afford to invest that it drives up the average.

You might think that is a problem, or you might not. Either way, the findings help inform debate about Washington’s capital gains tax, which was passed this year by the Legislature. The legislation, according to the state Department of Revenue, “creates a 7 percent tax on the sale or exchange of long-term capital assets (stocks, bonds, business interests, or other investments, and many tangible assets) if the profits exceed $250,000 annually.”

For most of us, profits of $250,000 from investments is about as likely as having a unicorn in our backyard. And for most of us, I’m guessing, taxing profits above $250,000 seems perfectly reasonable.

As Kenan Fikri of the Economic Innovation Group, said: “The divide between those who get to supplement their labor-earned income with capital income and investment income, and those who don’t, is a real big dividing line today, and one that the pandemic put in even starker relief. We’ve seen the performance of assets divorced from the performance of the real economy for more than a decade, but especially since the onset of the pandemic.”

Yet there is a drawback. In Washington, income tax is not only nonexistent, it’s unconstitutional. That is what the state Supreme Court said in the 1930s, after the Legislature tried to implement such a tax during the Great Depression. Since then, an income tax has been the Third Rail of Washington politics, and critics of a capital gains tax argue that it amounts to an income tax.

Jason Mercier of the Washington Policy Center points to a response from the Internal Revenue Service: “You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

Recently, a lawsuit against the capital gains tax was allowed to move forward, despite arguments from the office of Attorney General Bob Ferguson. The issue is likely to land in front of the state Supreme Court, which could send the Legislature back to the drawing board.

But in considering a state capital gains tax, it seems there are two separate questions. One is whether it is constitutional, a reasonable and important question. But the other is whether it is the right thing to do. And when we reach a point in this country where money is not contingent on working, where wealth begets wealth and class divisions become self-perpetuating rather than the result of a meritocracy, a capital gains tax is, indeed, the right thing to do.

Getting there, however, is likely to require a change to the constitution rather than wishful thinking from the Legislature.