Tuesday, February 7, 2023
Feb. 7, 2023

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Jayne: Capital gains a taxing issue

By , Columbian Opinion Page Editor
Published:

If you are neither a lawyer nor an economist nor somebody who is likely to earn a $250,000 profit from the sale of stocks in a given year, the kerfuffle over Washington’s capital gains tax might be confusing.

And if you do fall into one or more of those categories, it likely still is confusing. Even with plenty of thoughtful and educational commentaries about the matter available online, an issue that could upend Washington’s tax structure remains complex and ethereal.

Yet while pundits weigh in on an interesting fiscal controversy that will be heard this week by the state Supreme Court, they typically overlook what seems to be a salient point: Isn’t there something wrong with a system that allows an individual to accumulate $196 billion in wealth?

That’s how much Jeff Bezos is worth, according to the latest assessment by Forbes. And it means his net worth is about the same as the annual gross domestic product of Ukraine — that’s a country, not a person.

But first things first. In April 2021, the Legislature passed a tax on long-term capital gains. The measure has been delayed by court challenges; if implemented, it will impose a 7 percent tax on profits above $250,000 for the sale of assets — things like stocks and bonds. So, if you sell stocks for a profit of $500,000, you will owe a capital gains tax of $17,500.

Because more than 40 states have a capital gains tax — on top of the federal capital gains tax — you wouldn’t think this is a big deal. You would be wrong — because Washington is not most states. A state personal income tax is not only nonexistent here, it’s unconstitutional.

At least 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 an electric socket that lawmakers keep trying to probe with a fork.

Which is relevant to the current argument. The Legislature — represented in court by the office of Attorney General Bob Ferguson — is calling the proposed tax an excise tax. Challengers to the tax insist that it is an income tax, and therefore unconstitutional.

Excise tax. Income tax. I say tomato, you say, um, er, tomato (that works better verbally than in print).

But calling the tax an excise tax sounds like a specious argument. As the Internal Revenue Service explains: “Excise taxes are taxes that are imposed on various goods, services and activities.” And whether selling stock falls under “activities” likely will be at the center of the court decision.

Then again, as we have established, I am not a lawyer. And I’m not sure I would want to argue against Bob Ferguson on something as mundane as porter vs. IPA, let alone a legal question.

Proponents of the tax say that only an estimated 8,200 Washington residents will be subject to it, and that it is earmarked for education and therefore will benefit the state. Interesting points, but completely irrelevant to the constitutionality of the law.

Opponents say the tax will cause the richest of the rich to leave or avoid Washington and will lead to future taxes and will be detrimental to the state. Again, interesting points, but completely irrelevant as a legal matter.

Yet in the long run, questions that are not germane to the capital gains tax are the most interesting part of the issue.

That’s because Washington has what is often called the most regressive tax system in the country. With no income tax and with a heavy reliance on sales tax, low- and middle-income residents bear an inordinate percentage of the state’s tax burden.

We could argue that this system is what has generated one of the best economies in the nation, attracting and producing innovators and investors. Or we could argue that wealth inequality is not only a matter of individual brilliance but is partly the result of systems that benefit those who already have capital.

Those questions go beyond the purview of the state Supreme Court. And in trying to answer them, the issue of a capital gains tax seems positively simplistic.

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