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Capital-gains and compensation taxes proposed

Capital gains and compensation taxes proposed

A capital-gains tax and a tax on compensation will be on the table when the next legislative session convenes January 11.

Gov. Inslee recently unveiled his budget proposal, which calls for a capital-gains tax.  Separately, some legislators are floating draft legislation that would enact taxes on businesses for employees earning $150,000 or more.  AGC is opposed to both of these proposals.

The Governor’s capital-gains tax proposal would apply a 9% tax to capital-gains earnings above $25,000 for individuals and $50,000 for joint filers. If passed the tax, which would not take effect until the second year of the next biennium, would raise an estimated $1.1 billion in fiscal year 2023 and more than $2.4 billion during the 2023–25 biennium.

The capital-gains tax is controversial for many reasons, not the least of which is the fact that it is an income tax and, therefore, barred by the state constitution.  This article from the Washington Policy Center elaborates.

Also in the Governor’s budget proposal is a narrowing of the scope of the existing bad debt deduction on business and occupation taxes and the bad debt credit/refund on sales/use tax. Under this change, sellers will only be allowed to claim these tax preferences for bad debts from nonpayment by their own customers. Sellers will no longer be able to claim these tax preferences for reimbursement of losses sustained by third party creditors of their customers. Narrowing these tax preferences will generate about $36.2 million for the state General Fund during the 21–23 biennium.

And, to fund new public-health services, the governor’s budget proposes a new “covered lives assessment.” For each person covered, the state will assess a charge on health insurers, Medicaid-managed care organizations, limited health-services contractors and third-party administrators. The per-member, per-month fee will be set and adjusted to bring in $205 million in fiscal year 2023 and about $343 million in the 2023–25 biennium. The state Office of the Insurance Commissioner will determine and collect the assessment.

The statewide employer-compensation tax is not part of the Governor’s proposal, but it is an idea being discussed by some legislators.  This proposal would apply a statewide compensation tax on large companies for employees earning above the $150,000 annual threshold. Salaries below that cap can be deducted from employers’ taxable payroll expenses. The legislation makes an exception for “small businesses” defined as any business that reports annual compensation expense of no more than $7 million in the immediately preceding tax year.  Other elements of the proposal:

  • Businesses world-wide annual compensation expense of at least $7 million but less than $100 million, the rate is .25%
  • Businesses with world-wide annual compensation expense of at least $100 million, the rate is .5%
  • Deductions for employees with annual compensation that is less than $150,000
  • The amounts shall increase commensurate with the rate of growth of the prior year’s June-to-June consumer price index (CPI-U) for the Seattle-Tacoma-Bellevue area as published by the United States department of labor; (2) If the annual change in the CPI-U is negative, no adjustment to the amounts must be made.
  • A limited liability company, a professional liability company, a partnership, or any other pass-through entity, shall report and pay the tax on employer compensation as defined. Self-employed individuals shall report and pay the tax on the payroll expense with respect to themselves.

Notably, the Seattle Metropolitan Chamber of Commerce recently filed a lawsuit against the Seattle City Council’s recently passed payroll tax that is similar to the state proposal, citing the need to protect local businesses, particularly in the downtown core.  “This illegal tax puts Seattle’s economic recovery at risk, now and years into the future,” said Alicia Teel, the Chamber’s senior vice president of public affairs and communications. “The Seattle City Council overstepped when they rushed this tax through. By playing fast and loose with its taxing authority, the Council added another headwind to Seattle’s economic recovery.”

The Legislature does not convene until January 11, so none of the above proposals have been officially introduced and details may change.  It is unclear that proponents have enough votes to get them through during the session.  The capital-gains tax, for example, has been proposed during several legislative sessions and has not yet been enacted.

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

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