Despite substantial state revenue growth, Gov. Jay Inslee is proposing a 9 percent income tax on capital gains. This is just one of several tax increases the governor is pushing for in his massive 2019-21 budget proposal.

The governor claims his new capital gains tax is an “excise tax” and not an income tax. He does this in an attempt to avoid the state’s constitutional prohibition on graduated income taxes.

Yet, there is no debate on this point—a capital gains tax is an income tax. This according to the Internal Revenue Service, every state revenue department in the country, and just plain common sense.

As explained by the IRS: “Capital gains are treated as income under the tax code and taxed as such.”

Beside the fact a capital gains income tax is unconstitutional in Washington, imposing one would also be bad budget policy for the state. Washington currently has one of the most stable tax bases in the country; property taxes are very stable.

A capital gains income tax, however, is well known throughout the country as one of the most volatile tax sources possible.

To illustrate, California Gov. Jerry Brown in 2014 pushed for a constitutional amendment to restrict the use of capital gains for state spending. Heeding his warnings about the volatility of capital gains, California voters approved it.

The Washington Department of Revenue also had this warning regarding the 2012 capital gains income tax proposal, House Bill 2563: “Capital gains are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented.”

If enacted, Washington would be the only state in the country with a stand-alone income tax on capital gains. Doing this would throw away what the state Department of Commerce says is not only a “competitive advantage” for the state but also “is great marketing” for Washington. If an income tax is imposed, Commerce warned that would mean “one less tool that we have in our economic development tool box.”

Not only is a capital gains income tax unconstitutional, adopting one would inject extreme volatility into the state’s budget. This could set up a constant push year after year to raise taxes even higher to balance the budget. 

Being unconstitutional and extremely volatile demonstrates an income tax on capital gains is a true twofer of bad policy and should be rejected.

On the one hand, you have the IRS and every state revenue department in the country saying a capital gains tax is an income tax. On the other hand, you have those who are trying to evade Washington’s constitutional prohibition on graduated income taxes. Who are you going to believe?

Jason Mercier is the government reform director for Washington Policy Center, a nonprofit, nonpartisan research organization with offices in Spokane, Tri-Cities, Seattle, and Olympia. WPC is online at 

www.washingtonpolicy.org