State legislative report 0307: Senate passes capital gains tax

By Diana Carlen
WAWG Lobbyist

Thursday marked the halfway point of this year’s 105-day regular legislative session, which is scheduled to end on April 25. Lawmakers in both chambers have been debating and taking votes on dozens of bills in lengthy day and late evening sessions for the past two weeks. Unless considered Necessary to Implement the Budget, all bills must be passed out of their chamber-of-origin (the House must approve House bills; the Senate must approve Senate bills) by the next legislative cutoff deadline, Tuesday, March 9.

Senate Passes Capital Gains Tax

On Saturday, the Senate narrowly passed legislation by a vote of 25-24 to establish a capital gains tax. Engrossed Substitute Senate Bill 5096, sponsored by Sen. June Robinson (D-Everett), would establish a capital gains tax of 7 percent on capital gains that exceed $250,000 in a given year. Earnings from retirement accounts and home sales would be exempt.

There was a lengthy and spirited debate on the legislation with several amendments considered and most of them being rejected. Republicans argued that a new tax was not needed, a capital gains tax is really an income tax which is unconstitutional in the state and the voters have spoken multiple times rejecting income tax proposals. The majority of Democrats argued that Washington’s tax system is regressive and that this legislation would only impact a small group of high earners. Republicans see this as opening the door for a full-blown income tax on all Washingtonians.

Three members of the Senate Democrat Caucus voted no on final passage: Sens. Steve Hobbs (D-Lake Stevens), Annette Cleveland (D-Vancouver) and Mark Mullet (D-Issaquah). All Republicans voted against it, along with Sen. Tim Sheldon, a Democrat from Potlatch who caucuses with Republicans.

Early versions had excluded certain agricultural property and qualified family-owned small businesses from the tax. However, the bill voted on the Senate floor removed the agricultural land exemption in place of an exemption on the sale or exchange of “all real estate.” However, the definition of real estate excludes individual ownership or beneficial ownership in a pass- through entity that owns real property. This effectively means when a pass-through entity, with individual owners, sells or exchanges real estate (which had been held for more than a year), the capital gains tax would flow through to the owners and taxed at the time when the owners recognize the gain (or loss). There are concerns around this effect. Essentially a C Corp can sell or exchange real estate and not have to pay the capital gains tax. If a pass-through entity sells or exchanges real estate, the tax applies to the individuals.

Under the legislation, $350 million per year of the capital gains revenue would be placed in an account that pays for investments in early education programs. The remainder of the tax revenue, an estimated $200 million, would go into a new taxpayer relief fund, but it is unclear what would be funded through that fund.

One bright spot was that a floor amendment to strike the emergency clause was removed from the bill that would have prevented voters from having a say on this proposal. It is likely there will be a statewide referendum to reject this. Voters in Washington state have long rejected income tax proposals.

Similar capital gains tax proposals have been debated in recent years, but never made it out of the Senate. It now heads to the House of Representatives for further consideration. It is notable that the House has its own capital gains proposal (HB 1496) which has different tax rates and exemptions than the proposal in the Senate. This means the capital gains tax could very well clear the Legislature this year and become law, since Democratic leaders in the House and Democratic Gov. Jay Inslee have long supported it.

Proponents of a capital gains tax have wanted for years to pass a capital gains tax to set up a court challenge to overturn Washington precedent holding that income taxes are illegal. Bill sponsors have said they consider a capital gains tax an excise tax, not an income tax. The Washington State Supreme Court has long held that income is “property,” and property must be taxed uniformly, not at graduated rates.

Public Hearing Held on Carbon Tax Proposal

On Thursday, March 4, the Senate Environment, Energy and Technology Committee held a public hearing on an alternative carbon pricing proposal. SB 5373, sponsored by Sen. Liz Lovelett (D-Anacortes), that would establish a carbon tax and green bond program.

The proposal would institute a carbon tax starting July 1, 2022, at the rate of $25 per ton of greenhouse gas emissions. The tax rate would automatically increase annually by 5 percent each year and would be adjusted for inflation. Revenues from the tax would support projects that reduce greenhouse gas emissions and climate-related bond repayments.

Notably, the sponsor did reach out to agriculture to try and alleviate some of the impacts to agriculture. The bill excludes on-farm fuel usage from the tax and provides a five-year exemption for off-farm fuel usage. Also exempt from the tax would be energy-intensive, trade-exposed (EITE) businesses as defined by the state Departments of Commerce and Ecology.

Despite some exemptions for agriculture, Washington Association of Wheat Growers President Ryan Poe testified with concerns on the proposal noting that after exemptions expire, the tax will significantly raise the cost of doing business for farmers across the state, and the tax will disproportionally impact rural communities in Washington.

Revenue from the carbon fee could be used for on-farm projects or activities such as soil and fertilizer management and carbon sequestration in ag soils, as well as funding to convert farm vehicles to cleaner alternative fuels. However, in order receive funding under this bill, you must agree to pay prevailing wage and provide pensions and health insurance for your employees.

The tax would raise an estimated $1.6 billion for the 2021-23 biennium, then increase to $4.2 billion in 2023-25. The bill creates a 10-member Environmental Justice and Economic Equity Panel that would provide recommendations on green bond project.

Negotiations Continue on Agriculture Overtime Issue

Negotiations continue on how to respond to the recent Washington State Supreme Court decision on dairy workers being entitled to overtime pay and protecting agriculture from retroactive liability for overtime wages. SB 5072 is currently sitting in the Senate Rules Committee. This issue is likely not to be resolved until late in session.

Notable Floor Action This Week:

The following bills have passed by a vote of the entire House of Representatives or Senate. Once a bill passes out of one chamber, it then moves to the second chamber, and the process repeats.

  • Paid Family and Medical Leave Expansion (2SHB 1073), sponsored by Rep. Liz Berry (D-Seattle), has been heavily amended since its introduction. The amended proposal establishes temporary, alternate eligibility requirements for the Paid Family and Medical Leave Program for individuals that do not meet the program’s hours worked threshold in 2020. Additionally, the house adopted a floor amendment to clarify that grants for employee leave related to alternate eligibility created by the legislation may not be funded from the family and medical leave insurance account. The bill passed off the house floor by a vote of 56-40.
  • Allowing Whistleblowers to Bring Actions on behalf of State Workplace Protections (SHB 1076), sponsored by Rep. Drew Hansen (D-Bainbridge Island), would allow attorneys to bring actions in the name of the state against employers for worker violations under various state laws and get attorney fees. The bill was amended in the House Appropriations Committee to remove the following laws that may be enforced under a qui tam action: laws relating to seasonal labor and agricultural labor. While there were 25 amendments debated on the House floor, none of the amendments were adopted and the bill passed the House by a vote of 53-44.
  • Dredged Material Disposal (SHB 1193), sponsored by Rep. Larry Hoff (R-Vancouver), would modify the Shoreline Management Act to exempt federal navigation channel maintenance and improvement projects from the permitting process. The bill was unanimously passed by the house and will proceed to the Senate Environment, Energy and Technology Committee for consideration.
  • Paid Family and Medical Leave Expansion (ESSB 5097), sponsored by Sen. June Robinson (D-Everett), would expand the definition of family member under Washington’s Paid Family and Medical Leave law. The current version of the bill includes a narrowed definition of family member from the original, defining family member as an individual regularly residing in an employee’s home or an individual dependent on care from an employee. The bill was also amended to remove changes to the time period that qualifies an employee for job and health insurance protection and includes new language requiring the Employment Security Department to report on Paid Family and Medical Leave utilization. The bill was passed out of the Senate by a vote of 29-19 and referred to the House Labor and Workplace Standards Committee for consideration.
  • Environmental Justice Task Force Recommendations (E2SSB 5141), sponsored by Sen. Rebecca Saldaña (D-Seattle), creates an Environmental Justice Council (EJC) to provide environmental justice guidance and review for significant actions taken by state agencies. The bill was amended in the Senate Ways and Means Committee to require members of the council be confirmed by the Senate. The House also adopted amendments to clarify that the role of the EJC was advisory and requires the EJC to report to the governor and legislature by Nov. 30, 2022, on its recommendations. The bill passed off the Senate floor by a vote of 28-21 and is scheduled for a hearing in the House Environment and Energy Committee next week. The amended bill can be found here.
  • Fertilizer fees (SSB 5318), sponsored by Sen. Judy Warnick (R-Moses Lake), would increase fertilizer distribution application, license, inspection, and late fees. The bill passed the Senate chamber by a vote of 31-18.
  • Irrigation District Elections (SSB 5342), sponsored by Sen. Mark Schoesler (R-Ritzville), would permit irrigation district board of directors, by adoption of resolution, to conduct an election via mail-in ballots. The bill also clarifies who may vote in an irrigation district election and establishes measures to ensure election security. On Tuesday, the bill passed unanimously off the Senate floor and was referred to the House State Government and Tribal Relations Committee.