Washington State’s Senate voted to pass a bill on a capital gains tax on the sale of stocks, bonds and other assets to increase the share of state taxes paid by Washington’s wealthiest taxpayers.

The proposal has changed significantly since it was first introduced. In its currently drafted form, the state would apply a 7% tax on the sale of stocks and bonds, personal property and businesses, but only if those profits exceed $250,000 for individuals and joint filers, annually. A person whose business makes more than $10 million per year is also subject to the tax if they make more than $250,000 in selling the business. These taxpayers would be required to file a return with the Department of Revenue on or before the due date of their Federal tax return.

The Senate voted on March 6, 2021 and the bill is now headed to the House, where it will likely have the votes to pass. If it continues, it will officially take effect January 1, 2022 and is expected to affect the top 1% of earners, an estimated -,000 to 18,000 taxpayers across Washington State. Projections estimate it would raise $500-$550 million per year, starting in fiscal year 2023. About $350 million of that would be deposited into an account that pays for education systems, and the rest would be put into a new taxpayer relief account. The actual amount collected will depend on fluctuations in the financial markets and can be expected to vary from year to year.

Retirement accounts, residential and commercial real estate, family owned small businesses making less than $10 million a year, the sale of livestock related to farm or ranching, and timber are exempt from the tax.

Earned income from salaries and wages are not capital gains and will not be taxed at all under this proposal.

Proponents of the bill argue it’s an excise tax on long-term capital gains, aimed at the wealthiest residents — a very small percentage of the population. They also argue that it will help solve the issue of lower-income residents paying a higher percentage of their income in taxes than the wealthy (about 17%), who pay 3% or less of their income to taxes.

Opponents of the bill argue it’s an income tax and therefore illegal, according to Washington’s Constitution. They also argue that over time, if upheld by the courts, the current exemptions in place will erode and eventually more residents will be subject to the tax.

An emergency clause was removed from the bill, which would have exempted it from the referendum process and allowed the bill to take effect immediately upon signature by the governor instead of 90 days after the legislative session. Removal of this clause means that opponents could seek a referendum on the measure if they collect enough voter signatures to qualify for the November ballot. While it’s highly likely this bill will pass in the House and be signed into law, it will likely face legal challenges along the way to implementation.

While waiting for this bill to become final, we can proactively think about strategies to minimize your potential tax burden at the Federal and now, State level. For example, being mindful of turning income that would be subject to the tax (based on the drafted legislation) into other types of income that would ultimately become exempt to this tax. Contact us today to discuss your specific scenario.