Senate Bill 5096 proposed a 9% capital gains tax for the sale or exchange of long term capital assets, beginning January 1, 2022. Governor Inslee has signed the bill.
The bill would apply to individuals as well as to owners of pass-through entities such as LLCs. Due to lobbying by Realtors, the law exempts single family residences, condominiums, duplexes, and triplexes.
You can read the bill here:
http://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/Senate%20Bills/5096.pdf?q=20210116091514
There is a budget deficit in Washington State and the state is and will continue to be looking for new ways to collect taxes. The capital gains tax is unconstitutional under the Washington State Constitution. The state Supreme Court has so far ruled consistently that income is property and that an income tax is prohibited without a constitutional amendment.
Groups such as the Opportunity for All Coalition are planning lawsuits:
“The Opportunity for All Coalition plans to file a lawsuit against the recently passed statewide capital gains tax – which looks a lot like a state income tax. Washingtonians have rejected income tax measures 10 times before. The state’s constitution clearly prohibits this type of tax, something that its supporters know. On top of that, it is totally unnecessary given current state budget surpluses, and will only serve to inhibit job creation and economic prosperity.”
A lawsuit is exactly what Democrats want. The goal is to impose a state income tax with just a simple majority vote, as described in the following article:
emails authored by Senator Pedersen discuss the goal for the capital gains income tax:
April 30, 2018 — “But the more important benefit of passing a capital gains tax is on the legal side, from my perspective. The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.”
Dec. 15, 2018: “I personally believe that adopting a capital gains tax is one of the best things we could do to help advance the possibility of an income tax in our state, because it could help resolve the legal uncertainty about whether an income tax is a ‘property tax’ subject to constitutional limitations. Until that happens, it would take 2/3 majorities in the legislature (and a vote of the people) to adopt an income tax, which makes it very unlikely to happen.”
With all the Inslee appointed Supreme Court justices, it is quite possible that the capital gains tax will be declared constitutional (they are calling it an excise tax and an excise tax is arguably different from a capital gains tax). Then it may be just a matter of time before we have a state income tax.
Real estate investors should not immediately panic about a state income tax. While it is obviously preferable to invest in states that do not have a state income tax, most landlords have a loss on paper after taking depreciation deductions, at least in the early years of the investment, particularly if they have mortgages on their properties. If Washington State calculates net income the same way that the Feds do, a state income tax may not have much of an effect on real estate investors. The bigger effect would be from state capital gains taxes, if modified some day to include gains on residential real estate investments.