Bill Summary – FastDemocracy

H-0318.5
                                 HOUSE BILL 1496
     State of Washington         67th Legislature      2021 Regular Session
     By Representatives Senn, Walen, Davis, J. Johnson, Ramel, Bergquist,
     Macri, Gregerson, Simmons, Sells, Peterson, Bateman, Berry, Lekanoff,
     Frame, Fitzgibbon, Duerr, Hackney, Slatter, Kirby, Thai, Chopp,
     Valdez, Riccelli, Pollet, Ormsby, Harris-Talley, and Stonier
     Read first time 02/05/21.   Referred to Committee on Finance.
      AN ACT Relating to creating a more progressive tax system in
  Washington by enacting an excise tax on sales and extraordinary
  profits of high valued assets; adding a new section to chapter 82.04
  RCW; adding a new section to chapter 82.32 RCW; adding a new chapter
  to Title 82 RCW; creating new sections; and prescribing penalties.
  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:
                                  Part I
                                  Intent
     NEW SECTION.      Sec. 101.     (1) The legislature recognizes
 Washington's tax system is the most regressive in the nation because
 it asks those making the least to pay the most as a percentage of
 their income. This makes household costs, like child care and food,
 even more burdensome. Before the COVID-19 pandemic, middle-income
 families in Washington paid two to four times in taxes, as a
 percentage of household income, as compared to top earners in the
 state. Low-income Washingtonians paid six times more than did our
 wealthiest residents.
     Since March, this has been exacerbated as the world's wealthiest
 have seen their wealth increase dramatically while families struggled
 to pay for essentials like food and rent. In fact, billionaires have
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 seen their wealth increase 57 percent on average throughout the
 pandemic. At the same time, 100,000 people in Washington have signed
 up for food and cash assistance, and temporary assistance for needy
 families has increased significantly, including doubling in some
 counties east of the Cascade mountains.
     The legislature recognizes that the impact of COVID-19 to
 businesses has been devastating. The hospitality and leisure industry
 alone has lost a net of 100,000 jobs since spring. Nine months into
 the pandemic, employment declines are still 30 percent greater than
 the deepest point in the great recession a decade ago, and 7 percent
 of the state's workforce is collecting unemployment.
     The   child   care   industry,   possibly    the   most  critical
 infrastructure for our economic recovery, is in dire crisis, and it
 is costing Washington families and businesses. The lack of child care
 access in Washington costs businesses $2,080,000,000 a year, and
 working parents forgo $14,000,000,000 a year in lost wages.
     To address the economic and child care crises in a fair and
 equitable way, we must invest in our child care system to sustain
 diverse child care businesses, ensure families can access affordable
 child care, and spur economic recovery.
     The legislature finds that a tax system that is fair, balanced,
 and works for everyone is essential to help all Washingtonians grow
 and thrive. Our tax system must strengthen the middle-class economy,
 help low-income and middle-income families, and ask the wealthiest
 among us, who are benefiting the most in our economy and current tax
 structure, to contribute their fair share. We must ensure our tax
 structure is funding critical needs like behavioral health, housing
 for homeless and working families, feeding seniors, providing school
 counselors and nurses, or supporting innovation.
     (2) The excise tax on capital gains is a tax on the one-time,
 voluntary sale or transfer of a capital asset, not a tax on ownership
 of the asset itself. This excise tax is paid only by those Washington
 residents who engage in such voluntary sales or transfers, and is
 measured by the realization of significant gain on the transaction.
 In order to protect against further regressive impacts of the tax
 system, encourage the everyday investments that Washingtonians of all
 income levels strive for, and support our economy, this excise tax
 will not apply to capital gains realized by certain sales and
 transfers. The legislature specifically finds and declares that the
 excise tax on the voluntary sale or transfer of capital assets is
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  necessary for   the   support   of   state   government   and   its   existing
  institutions.
                                  Part II
                             Capital Gains Tax
     NEW SECTION.   Sec. 201.   The definitions in this section apply
 throughout   this  chapter   unless  the  context  clearly  requires
 otherwise.
     (1) "Adjusted capital gain" means federal net long-term capital
 gain:
     (a) Plus any amount of long-term capital loss from a sale or
 exchange that is exempt from the tax imposed in this chapter, to the
 extent such loss was included in calculating federal net long-term
 capital gain;
     (b) Plus any amount of long-term capital loss from a sale or
 exchange that is not allocated to Washington under section 207 of
 this act, to the extent such loss was included in calculating federal
 net long-term capital gain;
     (c) Plus any amount of loss carryforward from a sale or exchange
 that is not allocated to Washington under section 207 of this act, to
 the extent such loss was included in calculating federal net long-
 term capital gain;
     (d) Less any amount of long-term capital gain from a sale or
 exchange that is not allocated to Washington under section 207 of
 this act, to the extent such gain was included in calculating federal
 net long-term capital gain; and
     (e) Less any amount of long-term capital gain from a sale or
 exchange that is exempt from the tax imposed in this chapter, to the
 extent such gain was included in calculating federal net long-term
 capital gain.
     (2) "Capital asset" has the same meaning as provided by Title 26
 U.S.C. Sec. 1221 of the internal revenue code and also includes any
 other property if the sale or exchange of the property results in a
 gain that is treated as a long-term capital gain under Title 26
 U.S.C. Sec. 1231 or any other provision of the internal revenue code.
     (3) "Federal net long-term capital gain" means the net long-term
 capital gain reportable for federal income tax purposes determined as
 if Title 26 U.S.C. Secs. 1400Z-1 and 1400Z-2 of the internal revenue
 code did not exist.
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     (4) "Individual" means a natural person.
     (5) "Internal revenue code" means the United States internal
 revenue code of 1986, as amended, as of the effective date of this
 section, or such subsequent date as the department may provide by
 rule consistent with the purpose of this chapter.
     (6) "Long-term capital asset" means a capital asset that is held
 for more than one year.
     (7) "Long-term capital gain" means gain from the sale or exchange
 of a long-term capital asset.
     (8) "Long-term capital loss" means a loss from the sale or
 exchange of a long-term capital asset.
     (9) "Real property" has the same meaning as in RCW 82.45.032.
     (10)(a) "Resident" means an individual:
     (i) Who is domiciled in this state during the taxable year,
 unless the individual (A) maintained no permanent place of abode in
 this state during the entire taxable year, (B) maintained a permanent
 place of abode outside of this state during the entire taxable year,
 and (C) spent in the aggregate not more than 30 days of the taxable
 year in this state; or
     (ii) Who is not domiciled in this state during the taxable year,
 but maintained a place of abode and was physically present in this
 state for more than 183 days during the taxable year.
     (b) For purposes of this subsection, "day" includes any portion
 of a day, except that a continuous period of 24 hours or less may not
 constitute more than one day.
     (c) An individual who is a resident under (a) of this subsection
 is a resident for that portion of a taxable year in which the
 individual was domiciled in this state or maintained a place of abode
 in this state.
     (11) "Taxable year" means the taxpayer's taxable year as
 determined under the internal revenue code.
     (12) "Taxpayer" means an individual subject to tax under this
 chapter.
     (13) "Washington capital gains" means an individual's adjusted
 capital gains, less:
     (a) $200,000; or
     (b) $400,000 for individuals filing joint returns under this
 chapter.
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     NEW SECTION. Sec. 202. (1) Beginning January 1, 2022, a tax is
 imposed on all individuals for the privilege of selling or exchanging
 long-term capital assets as follows:
     (a) The tax equals seven percent multiplied by the individual's
 Washington capital gains on real property; and
     (b) The tax equals 9.9 percent multiplied by the individual's
 Washington capital gains on all other long-term capital assets.
     (2) If an individual's Washington capital gains equal an amount
 that is less than zero for a taxable year, no tax is due under this
 section and no such amount is allowed as a carryover for use in the
 calculation of that individual's adjusted capital gain, as defined in
 section 201(1) of this act, for any taxable year. To the extent that
 a loss carryforward is included in the calculation of an individual's
 federal net long-term capital gain, as defined in section 201(3) of
 this act, and that loss carryforward is directly attributable to
 losses from sales or exchanges allocated to this state under section
 207 of this act, the loss carryforward is included in the calculation
 of that individual's adjusted capital gain. An individual may not
 include any losses carried back for federal income tax purposes in
 the calculation of that individual's adjusted capital gain for any
 taxable year.
     (3)(a) The tax imposed in this section applies to the sale or
 exchange of long-term capital assets owned by the taxpayer, whether
 the taxpayer was the legal or a beneficial owner of such assets at
 the time of the sale or exchange. The tax applies when the Washington
 capital gains are recognized by the taxpayer in accordance with this
 chapter.
     (b) For purposes of this chapter, an individual is a beneficial
 owner of long-term capital assets held by an entity that is a pass-
 through or disregarded entity for federal tax purposes, such as a
 partnership, limited liability company, S corporation, or trust, to
 the extent of the individual's ownership interest in the entity as
 reported for federal income tax purposes.
     NEW SECTION. Sec. 203. This chapter does not apply to the sale
 or exchange of:
     (1) A principal place of residence with a selling price of
 $5,000,000 or less. The residence must have been the individual's
 principal place of residence for at least 24 full months of the five
 years immediately preceding the sale or exchange. For the purposes of
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 this subsection, "residence" means a single-family dwelling unit,
 whether such unit be separate from, or part of, a multiunit dwelling,
 including the land on which such dwelling unit is located. "Selling
 price" has the same meaning as in RCW 82.45.030;
     (2) Assets held under a retirement savings account under Title 26
 U.S.C. Sec. 401(k) of the internal revenue code, a tax-sheltered
 annuity or custodial account described in Title 26 U.S.C. Sec. 403(b)
 of the internal revenue code, a deferred compensation plan under
 Title 26 U.S.C. Sec. 457(b) of the internal revenue code, an
 individual retirement account or individual retirement annuity
 described in Title 26 U.S.C. Sec. 408 of the internal revenue code, a
 Roth individual retirement account described in Title 26 U.S.C. Sec.
 408A of the internal revenue code, an employee defined contribution
 program, an employee defined benefit plan, or a similar retirement
 savings vehicle;
     (3) Assets pursuant to, or under imminent threat of, condemnation
 proceedings by the United States, the state or any of its political
 subdivisions, or a municipal corporation;
     (4) Cattle, horses, or breeding livestock held for more than 12
 months if, for the taxable year of the sale or exchange, more than 50
 percent of the taxpayer's gross income for the taxable year,
 including from the sale or exchange of capital assets, is from
 farming or ranching;
     (5) Agricultural land by an individual who has regular,
 continuous, and substantial involvement in the operation of the
 agriculture that meets the criteria for material participation in an
 activity under Title 26 U.S.C. Sec. 469(h) of the internal revenue
 code for the 10 years prior to the date of the sale or exchange of
 the agricultural land;
     (6) Property used in a trade or business if the property is
 depreciable under Title 26 U.S.C. Sec. 167 of the internal revenue
 code, or qualifies for expensing under Title 26 U.S.C. Sec. 179 of
 the internal revenue code; and
     (7) Timber, timberland, or the receipt of Washington capital
 gains as dividends and distributions from real estate investment
 trusts derived from gains from the sale or exchange of timber and
 timberland. "Timber" means forest trees, standing or down, on
 privately or publicly owned land, and includes Christmas trees and
 short-rotation hardwoods. The sale or exchange of timber includes the
 cutting or disposal of timber qualifying for capital gains treatment
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 under Title 26 U.S.C. Sec. 631(a) or (b) of the internal revenue
 code.
      NEW SECTION. Sec. 204. The tax imposed under this chapter is in
  addition to any other taxes imposed by the state or any of its
  political subdivisions, or a municipal corporation, with respect to
  the same sale or exchange, including the taxes imposed in or under
  the authority of chapter 82.04, 82.08, 82.12, 82.14, 82.45, or 82.46
  RCW.
     NEW SECTION. Sec. 205. In computing tax, there may be deducted
 from the measure of tax amounts that the state is prohibited from
 taxing under the Constitution of this state or the Constitution or
 laws of the United States.
     NEW SECTION. Sec. 206. (1) In computing tax under this chapter
 for a taxable year, a taxpayer may deduct from the measure of tax the
 amount of adjusted capital gains derived in the taxable year from the
 sale of substantially all of the fair market value of the assets of,
 or the transfer of substantially all of the taxpayer's interest in, a
 qualified family-owned small business, to the extent that such
 adjusted capital gains would otherwise be included in the taxpayer's
 Washington capital gains.
     (2) For purposes of this section, the following definitions
 apply:
     (a) "Assets" means real property and personal property, including
 tangible personal property and intangible personal property.
     (b) "Family" means the same as "member of the family" in RCW
 83.100.046.
     (c)(i) "Materially participated" means an individual was involved
 in the operation of a business on a basis that is regular,
 continuous, and substantial.
     (ii) The term "materially participated" must be interpreted
 consistently with the applicable treasury regulations for section 469
 of the internal revenue code, to the extent that such interpretation
 does not conflict with any provision of this section.
     (d) "Qualified family-owned small business" means a business:
     (i) In which the taxpayer held a qualifying interest for at least
 eight years immediately preceding the sale or transfer described in
 subsection (1) of this section;
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     (ii) In which the taxpayer or his or her family member materially
 participated in operating the business for at least five of the eight
 years immediately preceding the sale or transfer described in
 subsection (1) of this section, unless such sale or transfer was to a
 qualified heir;
     (iii)(A) That had no more than 50 full-time employees at any time
 during the 12-month period immediately preceding the sale or transfer
 described in subsection (1) of this section.
     (B) For purposes of this subsection (2)(d)(iii), "full-time
 employee" means an employee who is, or any combination of employees
 who are, paid by the business for at least 1,820 hours of employment,
 including paid leave, for the 12-month period described in
 (d)(iii)(A) of this subsection (2); and
     (iv) That had worldwide gross revenue of $10,000,000 or less in
 the 12-month period immediately preceding the sale or transfer
 described in subsection (1) of this section.
     (e) "Qualified heir" means a member of the taxpayer's family.
     (f) "Qualifying interest" means:
     (i) An interest as