House Democrats propose 20% B&O tax increase, new capital-gains tax

 

With the state House-proposed operating budget approved by that body, eyes are now fixed on legislation needed to fund it. HB 2186 received a “do pass” recommendation from the House Finance Committee on April 4, after a public hearing the day prior.

AGC Chief Lobbyist Jerry VanderWood testified against the bill, including the B&O tax increase which will hit all construction categories.

House Democrats on the committee praised the bill as a needed revamp of the state’s taxing system that would provide relief to small businesses. However, Republican lawmakers and business leaders testifying during the public hearing opposed the bill, saying it could cause economic harm to communities and industries reliant on certain tax incentives that would be eliminated under the legislation. Senate Republicans also questioned whether the tax package can obtain the necessary House votes to clear that chamber.

Summary of B&O provisions

A 20 percent surcharge on the B&O tax is imposed for selected business activities, including construction-related categories such as retailing, wholesaling, highway contractors and government contracting. Other affected categories include extractors, manufacturers, real estate brokers, digital products/services, nonprofit research and development, insurance producers, hospitals, salmon canning, radioactive waste clean-up, insurance agents, radio & TV broadcasters, printers, publishers, extracting or processing for hire, warehousing, contest of chance, international investment management, custom software, loan interest, royalties, professional employer organizations, day care, chemical dependency services, and grocery distribution co-ops.

The small business B&O credit is repealed. The filing threshold for B&O taxes is increased to $150,000. A deduction of $250,000 is authorized for businesses with gross income of less than or equal to $250,000. If a business' gross income is greater than $250,000, but less than $500,000, there is a deduction of $100,000.

If a taxpayer claims a multiple activities tax credit, they can claim a credit instead of deduction. The credit for a calendar year will be equal to lesser of tax due or the amount: for person with gross income of less than or equal to $250,000, $250,000 multiplied by highest applicable B&O rate to taxpayer; or for person with gross income of greater than $250,0000, but less than $500,000, $100,000 multiplied by the highest applicable B&O rate to the taxpayer.

Summary of capital gains tax

A 7 percent tax is imposed on the adjusted capital gain of an individual for the privilege of selling or exchanging long-term capital assets, or receiving Washington capital gains. This tax is in addition to any other taxes imposed by state and local governments. This tax also applies to beneficial owners who are individual owners of long-term capital assets held by pass through, or other disregarded entity, to the extent the individual's ownership interest in the entity is reported for federal tax purposes.

A "Washington capital gain" is defined as an individual's adjusted capital gains allocated to this state less $25,000 for an individual, or $50,000 if filing jointly.  “Adjusted capital gain” is defined as the net federal long-term capital gain plus any loss from a sale or exchange that is exempt from the tax imposed in this chapter, and less any gain from a sale or exchange that is exempt from the tax imposed in this chapter, to the extent such gain or loss was included in calculating federal net long-term capital gain.

Long-term assets can include real estate and intangible or tangible personal property. For real estate, the capital gains tax applies if the real property sold or exchanged is in Washington, or the majority of the fair market value of the property is in this state. For intangible personal property, capital gains will apply if taxpayer was domiciled in WA at the time of sale or exchange. For tangible personal property, capital gains tax will apply if property was located in Washington at time of sale or exchange. The sale of tangible personal property will also be subject to the states capital gains tax if: (1) property was located in Washington at any time during the current or immediately preceding taxable year, (2) taxpayer was a Washington resident at time of sale or exchange, and (3) was not subject to income or excise tax on the adjusted capital gain by another taxing jurisdiction.

The following assets are exempt from the capital gains tax:  
• Residential dwellings that are a single-family residence, a residential condominium, a residential cooperative unit, or a floating home, including accessory dwelling units.
• Retirement assets, including 401(k), a tax-sheltered annuity and custodial account, deferred compensation plans, individual retirement accounts (IRAs), Roth IRAs, employee defined contribution program, employee defined benefit program or similar retirement saving vehicle.
• Assets condemned by the government. Cattle, horses, or breeding livestock held for more than 12 months if 50 percent of taxpayer's gross income for the year is from farming or ranching.
• Agricultural or timber lands that the taxpayer has regular, continuous, and substantial involvement in the operation of the land, and meets the federal criteria for "material participation" for 10 years previous to sale.
• Property used in a trade or business if it qualifies for depreciation under federal law.
• Timber or receipts from a Real Estate Investment Trust.

If passed, the proposed capital gains tax would likely face a legal challenge, based on the ban on income taxes in the state constitution. Senate Majority Leader Sen. Mark Schoesler (R-9) told reporters at an April 3 press conference that “You can call it (capital gains tax) what you want, but it still quacks like a duck.”

Republican lawmakers also expressed skepticism at the press conference whether the full House will approve the bill. Top-ranking Senate lawmakers have vowed not pass any new spending proposed in the House budget until legislation funding is also sent their way.

For more information, contact AGC Chief Lobbyist Jerry VanderWood, 360.352.5000.