The Washington State Capital Gains Tax
It is official: Washington State can now collect a state capital gains tax. The Washington State legislature had passed a capital gains tax levied at a rate of seven (7%) percent on the sale and exchange of certain types of long-term capital assets, including, but not limited to, stocks, bonds, and tangible assets. The state would levy the tax on assets that exceed $250,000 and only the portion of gain exceeding $250,000 would be subject to tax. The legislature expected that this tax would generate an estimated one billion dollars in tax revenue over the next two years.
The law came under challenge, however, by opponents who argued that the tax constituted an income tax impermissible under Washington law. Indeed, the opponents had significant support for their challenge, as most other states, as well as the IRS, currently categorize their capital gains taxes as a form of income tax. This challenge put a temporary halt on the collection of the tax.
However, the Supreme Court of Washington, in its majority opinion on March 24th, blocked the challenge and ruled that the capital gains tax acts as an excise tax because “it taxes transactions involving capital assets – not the assets themselves or the income they generate.” Since Washington State permits excise taxes, but not income taxes, this ruling upheld the constitutionality of the newly passed capital gains tax. Seven justices made up this majority opinion. Two justices dissented, arguing that the statute, RCW 82.87.040, taxes the gains or income recognized by the transferrer of a qualifying asset rather than the transfer itself.
Now with the constitutionality of the law upheld, the capital gains tax has become collectible, and Washington State now joins forty-one states and the District of Columbia in enforcing a capital gains tax. As of April, the Washinton state Department of Revenue has reported over $830 million in revenue because of the tax, far exceeding the initial projection of $248 million for 2023.
The legislature has built in a few exceptions, which include: (1) retirement accounts; (2) real estate; (3) farms and forestry; and (4) businesses where the owners have regularly involved themselves in running the business in five of the previous ten years before selling, owned the business for at least five years, and grossed $10 million or less a year before the sale. Overall, with these exceptions, the State expects that the tax will impact approximately 5,000 Washington taxpayers. Advocates of the new tax remain optimistic that it will generate much needed revenue for the State while minimizing the impact on the public, while detractors worry that the law will be a steppingstone toward the levy of new additional taxes.
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