A broken clock will be correct twice a day, but a broken record will be flawed every time you play it.
House Democrats in Olympia have dropped the needle once more on a tired old loser of a song, a ballad of yearning for a tax on income. They’re banking that this time around they’ll have a hit, but it seems the vinyl is more warped than ever.
One obstacle that proponents of an income tax face is the prohibition in Washington state law against taxes on income. Another is white-hot voter antipathy for the whole idea.
Democrats have orchestrated a cynical workaround that bends language and cudgels logic into submission. House Bill 2186 is the first pressing of that mix, in which – through the magic of word substitution – a tax on capital gains income becomes an excise tax.
Sorry, Democrats. The lyrics may have changed, but the song remains the same. In taxes, just as in biology, there are objective truths that no amount of creative renaming can avoid. I may desire to fly, but I can’t expect to get airborne just by calling my arms wings. Neither can an income tax be called an excise tax just because politicians want a soaring spending plan fueled from a newly tapped well of revenue.
Nevertheless, as the current legislative session winds down, the Democrats are moving forward with a disciplined effort to blur definitions and disorient voters.
On Tuesday, Rep. Laurie Jinkins (D-Tacoma) spoke with radio talk show host and veteran political analyst John Carlson on KVI 570 AM. (The entire podcast is also embedded at the bottom of this post. It’s well worth listening to the whole interview.)
Jinkins, now serving a fourth term representing the 27th legislative district, tried to walk Carlson and his listeners through her reasoning about why capital gains aren’t income. Not surprising, her logic was discordant and nonfunctioning.
Rep. Laurie Jinkins: Something qualifies to be an excise tax when you sell something voluntarily and you get revenue from the sale of that. So, the primary example is actually stocks and bonds.
You might buy a stock for $100 and sell it for $1,000. The capital gain is the $900 that you make as income just for selling something. …
It’s a transactional… An excise tax is a transactional tax.
So far, Jinkins isn’t wrong about what a capital gain or an excise tax are, but excise taxes are assessed on gross revenue, not net. It’s a meaningful distinction. Nonetheless, Jinkins strains to lay down a bridge between these disjointed ideas and justify how a tax on capital gains income can be defined as an excise.
Carlson: However, when you sell property or when you sell equity – stocks, bond, etc. – precious metals, whatever – the money that you gain from that that is taxed, that’s income. So, why isn’t this an income tax? You’re taxing me on what I’ve gained in income from selling that investment.
Jinkins: Well that’s, I mean, really this is kind of technical-legal, a technical/legal issue…
Carlson: (interjecting) It shouldn’t be.
Jinkins: If folks are going to argue that the capital gains tax is an income tax, then they’re going to argue that all sorts of things like the real estate excise tax, which the courts have long held is an excise tax and not an income tax under the Washington State…
If you’re still not feeling Jinkins’ groove here, you’re not alone. In fact, using the example of a real estate transaction makes it even clearer that an excise tax is assessed on a transaction, but not on any gain the seller receives. Real estate excise tax is calculated, generally, on the selling price, not the seller’s net proceeds. There’s a reason for that. If it were assessed on net proceeds, it would be a capital gains tax and capital gains are, legally and in common understanding, income.
A key feature of excise taxes is that they apply to the gross amount of a transaction. With capital gains, there can be no tax without gain, but with an excise tax a seller of a good or service would pay the tax even if they lose money. This is simply not true of an income tax.
This creature the Democrats are conjuring – the capital gains excise tax – is an impossibility. Once you realize a gain on the sale of property, you have more than you started with and everyone understands that intuitively as income. Yes, there was technically a transaction that occurred, but a capital gains tax isn’t triggered until a gain is received as income.
Carlson digs into that point further and prompts a backlash from the representative.
Jinkins: The issue of whether or not something is an income tax or an excise tax is really based on long-standing Washington state court decision that define the difference between what’s an income tax and an excise tax. And so this is an excise tax which is based again on the sale of something and the money that you earn on the sale of something and the money that you earn as the result of a sale of something…
Carlson: Or is an excise tax a consumption tax?
Jinkins: That’s what you want to call it because you think that people who hate an income tax will therefore hate a capital gains tax.
Jinkins swipe is ironic. It is obvious that the entire purpose for the Democrats’s word-swapping strategy is to ditch politically radioactive labels while also create confusion with voters. (The idea of an income tax is almost universally understood. Excise, not so much, as is further evidence by Jinkins’ struggle.) The notion of a capital gains excise tax is a chimera born of liberal desperation, but that won’t stop Democrats from attempting to bend reality to suit their needs.
Opponents of an income tax on capital gains are would be wise to aggressively smother this effort now, not only in Olympia, but among the voters at large who are not paying close attention. Once this hungry camel gets its nose under the tent, the odds of getting a favorable interpretation from the state Supreme Court are miniscule and it becomes a matter of tweaking the percentages, caps and exemptions to squeeze more tax out of more Washingtonians.
Many Washingtonians might think to themselves, “This isn’t something I have to deal with anyway.” That could be initially true, but time has a way of turning the tables when it comes to creeping taxation. Even in the initial implementation of such a plan, Washington residents should be consider that in order for state government to know that you did or did not receive any capital gains subject to the tax, a return filing would likely be necessary. Welcome to your newly christened state income tax mechanism.
Voters may yet have a chance to reject (again) an income tax in this newly repackaged form. There’s a good chance that Democrats will queue it up onto the playlist for the spotlight dance later this year in the 45th legislative district special election to decide who will permanently replace the late Sen. Andy Hill.
[Featured image credit: Adobe Stock]