This week, 4th District Congressman Dan Newhouse testified before the Washington State House Finance Committee in opposition to Engrossed Senate Substitute Bill (ESSB) 5096, a bill that would impose a new 7% tax on capital gains in Washington state.
Newhouse expressed his opposition to the bill citing Washington’s lack of income tax as one of the most competitive advantages offered to attract small business owners and entrepreneurs from across the country. Newhouse stated that enacting an income tax in Washington state is unconstitutional.
In 2018, Rep. Newhouse wrote to the Internal Revenue Service (IRS) questioning whether a tax on capital gains was considered an “excise tax” or an “income tax.” The response from the IRS was clear: “It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”
According to the Washington State Constitution, property cannot be taxed at a rate greater than 1%, and taxes must be uniformly applied to all residents. The Washington State Supreme Court has repeatedly ruled that a person’s “income” is considered property and that taxes on income must conform to the uniform 1% limit.
Newhouse’s testimony in full can be read below:
Thank you for having me today, Chair Frame and Ranking Member Orcutt.
As a representative of our great state in Congress, I know that Washington offers businesses – both large and small – several competitive advantages, including our lack of an income tax. This attracts entrepreneurs and small business owners from across the country and has enabled Washington to become a hotbed for innovation, empowering our citizens to make significant advancements in industries from healthcare and technology to energy and agriculture.
The legislation before us today would recklessly stifle this economic development.
There has been much discussion in this body on whether a levy on capital gains constitutes an income tax. In reality, there is simply no debate.
In 2018, I asked the IRS about the treatment of capital gains and whether it is considered an excise tax or an income tax. Their answer was clear and concise: “It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”
This answer should not be surprising, as every other jurisdiction in the country agrees.
What is also not up for debate is that an income tax is unconstitutional in Washington. For eight decades, the State Supreme Court has held that a graduated income tax is unconstitutional. If this legislation were signed into law, and in the off chance it is certified by the courts, it would open the door to an income tax on all Washingtonians and take away one of our best competitive advantages to attract new business.
I strongly encourage this committee to vote no on Senate Bill 5096.