Capital gains tax signed into law in Washington state

A new capital gains tax on high profit stocks, bonds and other assets was signed into law Tuesday by Washington Gov. Jay Inslee.

A legal challenge against the tax has already started, with one lawsuit filed last week and another expected.

The measure imposes a 7% tax on the sale of stocks, bonds, and other high-end assets in excess of $250,000 for both individuals and couples, and is expected to bring in $415 million in 2023, the first year the state would see money from the tax, which would start in January 2022.

Supporters of the tax say that Washington — one of a handful of states with no income tax on wages — leans too heavily on its sales tax, disproportionately affecting those with less income. Washington will join 41 states plus the District of Columbia in having a capital gains tax.

Inslee said the measure was "a big stride to more justice of overturning the upside down tax system which has been so unfair to Washingtonians for so many decades."

Retirement accounts, real estate, farms and forestry are exempt from the proposed tax. Business owners are also exempt from the tax if they are regularly involved in running the business for five of the previous 10 years before they sell, own it for at least five years, and gross $10 million or less a year before the sale.

RELATED: Lawsuit filed to block new Washington capital gains tax

Taxpayers can deduct up to $100,000 a year from their capital gains if they made more than $250,000 in charitable donations in the same tax year.

Opponents say the measure is a tax on income that violates previous state Supreme Court rulings and the state constitution because it is not a uniform taxation on property. The Freedom Foundation lawsuit also contends the new tax violates the Commerce Clause of the U.S. Constitution by taxing out-of-state assets owned by Washington residents.

Republican Sen. Lynda Wilson, the budget lead for her caucus, criticized the tax as volatile and unconstitutional, saying in a statement that the measure "is a partisan effort to get the current state Supreme Court to reverse decades of precedent and clear the path for a full-blown income tax – a tax our state has never had, doesn’t need and doesn’t want."

Last week, the conservative group Freedom Foundation, working with a Seattle law firm, filed suit on behalf of eight state residents in Douglas County Superior Court. A second group, the Opportunity for All Coalition, has also said they would sue.

Because of language added by the House that says the tax is necessary "for the support of state government and its existing public institutions," voters won’t be able to launch a referendum campaign this year. Voters could go the initiative route, but it has a higher signature requirement than referendums and would be an unlikely option before next year.

Also Tuesday, Inslee signed a bill that expands a tax credit for low-income workers and families that would start paying out benefits for the first time in 2023. The state tax exemption was created in 2008, but before this year, had never been funded. It is currently projected to pay out more than $240 million to 420,000 taxpayers in 2023, the first year benefits will be paid out. That amount jumps to over $500 million in the next two-year budget cycle that ends mid-2025.

Previously, the amount of the state benefit was 10 percent of a person’s credit from the federal program or $50, whichever is greater. Under the newly funded law, the base amount now ranges from $300 to $1,200, depending on the number of children a taxpayer has. The base amount phases out as income levels increase, with a minimum credit of $50.

For tax year 2021, a single taxpayer with no kids could have earned up to $15,980 and still be eligible for the minimum $50 rebate. For a married couple with more than two kids, that maximum qualifying income would’ve been $51,463 in 2021, according to a nonpartisan analysis.

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