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.