OLYMPIA — Gov. Jay Inslee's proposed capital gains tax received mixed reactions in its first public hearing this session.

The proposed tax was part of Inslee's budget proposals released in December. It would create a 9% tax on annual investment earnings of more than $25,000 for an individual and $50,000 for a married couple.

More than 100 people signed up to testify remotely on the bill with 524 more people signed in not wishing to testify. Opponents said it will hurt small business owners, who often use the sale of their business to fund their retirement. Supporters said it will help close the wealth gap that exists in Washington.

The tax is one of the most controversial aspects of Inslee's budget. It's been proposed before but has never made it through both chambers of the Legislature.

"This is the wrong direction for our state to go," Mark Johnson of the Washington Retail Association told the committee, arguing it would hurt small businesses.

Opponents say it is an unconstitutional income tax, but state experts believe it is legal and will withstand a court challenge. Inslee says it is a way to make the state's tax system less reliant on heavy taxes on lower income groups.

Sen. Lynda Wilson, lead Republican on the Ways & Means Committee, said in December that a new tax would likely pass but face a court challenge, calling it the "most volatile revenue source that there is. Every other state in the union calls it an income tax," she said.

Rep. Drew Stokesbary, ranking member of the House Appropriations Committee, said a capital gains tax is the wrong direction for the state and "just bad economic policy, especially right now."

"If we're telling people who have the capital to invest that it's going to cost them to do so, they're less likely to stay here and do it," he said.

Wayne Lunday, of the National Association of Insurance and Financial Advisers, said a 9% tax in the sale of his business would be a "killer" in his and his wife's retirement plans. He said a capital gains tax would be "devastating" for his and many other businesses.

Tommy Gantz at the Association of Washington Business told the committee that the global pandemic has put the economy on edge. Now is the time to prioritize removing obstacles to business owners, she said.

"We need economic recovery," she said. "Not tax increases."

On the other hand, Andy Nicholas of the Washington State Budget and Policy Center said a capital gains tax could help address the widening opportunity gap that the state has due to the lasting effects of institutional racism.

"Our tax system now is completely upside down," Cynthia Steward at the League of Women Voters of Washington said.

"A capital gains tax is a good first step."

Dr. Mark Vossler, of the Washington Physicians for Social Responsibility, said economic inequity is a major driver of poor health outcomes.

As the state emerges from the COVID pandemic, he said, now is not the time to be cutting the budget.

"I ask you to pass this bill and correct our unfair and unhealthy, regressive tax structure," he said.

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