Cities and towns across Washington state are currently leading a tax revolt as a response to “the Democratic-led state legislature’s attempt to impose a capital gains tax.” Those involved believe this could open the door to a state income tax which would threaten economic growth.
So far, five communities in Washington, including: Spokane, Spokane Valley, Battle Ground, Yakima, and Granger, have passed resolutions to outlaw local income taxes if the legislation passes. Local officials are worried as to what the outcome of the proposed legislation could do to small businesses.
History Behind Washington’s Tax Levy
In 1932, the Washington State Supreme Court ruled against an income tax levy and since then, there have been numerous attempts to amend that constitution to impose one. Washington Democrats have continued to press on and this past May, Washington approved a tax on capital gains with supporters arguing that it is not an income tax. Currently, capital gains are treated as regular income and therefore not taxed in the state of Washington. Lawsuits have been filed against the tax.
The tax is estimated to raise $415 million annually with a,
“…7 percent levy on capital gains from the sale of stocks, bonds, and other types of investments where the profit exceeds $250,000.”
Opponents of the tax say it is not only unnecessary, but also unconstitutional, adding that Washington already has a strong fiscal position on its own. They believe that Washington has a competitive advantage without the income tax.
Proponents say the capital gains tax will require wealthy citizens to “share in the responsibility of funding the needs of our communities and putting money back in the pockets of low-income families.” Washington is the third state to propose raising taxes despite rebounding unexpectedly well financially from the pandemic.
After economic downturns that impact government revenues, states usually raise taxes. The Democratic state leaders in Washington are now hoping to raise taxes in a time of unexpected economic growth.
The capital gains on the sale of Qualified Small Business Stock present a particular advantage in situations such as the current one in Washington. Thanks to Section 1202, these gains can be exempt from federal taxes and sometimes state taxes as well. While taxes on capital gains at the federal level are also at risk of a hike, QSBS remains safe retaining its potential 100% tax exclusion.
See how Washington has historically treated capital gains taxes and QSBS.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.