Washington voters will soon get the chance to weigh in on a controversial tax passed by the Legislature in 2021. This tax adds a 7% levy on capital gains income over $250,000, targeting the wealthy. However, lawmakers have already discussed expanding it to affect middle-income earners.
Here’s how we got here: In 2021, lawmakers passed and Governor Jay Inslee signed Senate Bill 5096, introducing the state’s first-ever tax on capital gains income.
Previously, the Washington State Supreme Court had ruled that such taxes were unconstitutional. The state constitution bans income taxes except in rare cases. To get around this, Democrats called the tax an “excise” tax. In a split decision, the state Supreme Court accepted this reasoning, overturning previous rulings.
In response, concerned citizens gathered over 454,000 signatures to put Initiative 2109 on the ballot, which would repeal the capital gains tax. Democratic leaders blocked a legislative vote on the measure, fearing it would pass. As a result, voters will now decide on Initiative 2109 directly.
Chances of it passing look good. Washington voters have consistently rejected income taxes, voting them down 10 times, including in 2010, when a similar measure lost by 64%.
Opponents of Initiative 2109 argue that repealing the tax would reduce state revenue, cut K-12 funding, and harm state programs. But this isn’t true. Washington’s budget is already at $72 billion, and tax revenue has doubled in the last decade. Revenue will continue to grow without the capital gains tax.
Critics also claim that the initiative will hurt childcare and worsen a “school funding crisis.” However, school funding in Washington is not in crisis. Public schools are spending more than $19,000 per student, which is more than many private schools charge for tuition.
Lastly, opponents suggest that passing Initiative 2109 would increase taxes on small businesses and working families. This is also false. The initiative would cut taxes and wouldn’t raise taxes on anyone. Reducing taxes on investments helps small businesses grow and create jobs. Taxes would only rise if lawmakers decide to increase other taxes after the initiative passes.
The capital gains tax has already driven businesses and investment out of Washington. After the law passed, Fisher Investments, which has 1,800 employees and $197 million in assets, moved out of the state. In October 2023, billionaire Jeff Bezos moved from Seattle to Florida, a state with no income tax, reportedly saving $600 million in capital gains taxes.
This trend is concerning. Washington used to attract businesses by promoting its lack of an income tax. But now, the state is losing jobs and investment. Washington, once known for innovation and business growth, is becoming less appealing to entrepreneurs.
There are two possible outcomes for Initiative 2109: If it’s defeated, Washington will continue to have a form of income tax. If it passes, the state will return to its tradition of no income tax.