Government Affairs Committee member Jaci Hayden testified on behalf of AGC before the Senate Ways and Means Committee April 26. Hayden expressed AGC’s opposition to SB 5929, a comprehensive tax increase bill, especially the bill’s proposed 20-percent B&O tax increase.
“Construction is one of the biggest employers in the state, with nearly a quarter million workers employed by contractors, construction services and material suppliers,” Hayden, who is also on the Steering Committee for AGC’s Future Leadership Forum, told the panel. “For each dollar invested in new construction, the state’s economy generates an additional $1.89 in economic activity, according to a University of Washington study. The Legislature could better harness the revenue-generating power of the construction industry by creating economic and regulatory conditions that promote construction, as opposed to simply increasing the cost of construction with this tax increase.”
SB 5929 was subsequently voted down unanimously on the Senate Floor. Although the tax package was promoted by Senate Democrats, Senate Republicans, who maintain majority control, forced a roll-call vote on the measure. Aware of the widespread opposition to the bill, all Senate Democrats joined all Senate Republicans in voting “no.”
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The small-business B&O credit is repealed.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 Washington 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 ten 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 (REIT).
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.”
For more information, contact AGC Chief Lobbyist Jerry VanderWood, 360.352.5000.