Guest Opinion: Tax code changes make Charitable Remainder Trusts more attractive

The changes in the tax laws have made the use of Charitable Remainder Trusts more attractive in transition planning.

Call it a capital gains tax or an “excise tax,” either way, opponents of two bills proposed by Washington state lawmakers say the IRS qualifies capital gains tax as an income tax. Washington is currently one of nine states without a personal income tax. This includes no state tax on capital gains income.

House Bill (HB) 1496 and Senate Bill (SB) 5096 would tax the sale of certain types of long-term assets with some exceptions. Both measures are a part of a proposal released by Gov. Jay Inslee (D) in the 2021-2023 biennium operating budget.

HB 1496, sponsored by Rep. Tana Senn (D-41-Bellevue), calls for a 7 percent tax for capital gains on real property and 9.9 percent for capital gains on all other long-term assets. An exemption of certain types of assets sold or exchanged would be $200,000 for single filers and $400,000 for joint filers.

According to the bill analysis, the tax is expected to generate $835 million in 2021-23 biennium and $1.8 billion from 2023-25. Most of that money would go to the Fair Start for Kids Account, with the rest deposited into the general fund account.

SB 5096, sponsored by Sen. June Robinson (D-38-Everett), proposes a 9 percent tax “on all individuals for the privilege of selling or exchanging long-term capital assets.” The first $25,000 in long-term capital gains is excluded from the tax for individuals filing single returns.

For individuals filing joint returns, the first $50,000 is excluded from the tax. An analysis of the bill estimates to generate $1.1 billion in the 2021-23 biennium and $2.6 billion in the 2023-25 biennium, with the funds going to the general fund account.

Both bills have mostly the same exemptions for assets sold or exchanged. Those exemptions are:

• The sale or exchange of any residential dwelling (HB 1496 stipulates selling price of $5 million or less);

• The sale or exchange of assets under most retirement savings vehicles;

• The sale or exchange of assets subject to eminent domain or sold or exchanged under imminent threat of eminent domain;

• The sale or exchange of cattle, horses, or breeding livestock held for more than 12 months by farmers if more than 50 percent of the taxpayer’s gross income is from farming or ranching;

• The sale or exchange of agricultural land or timberland by an individual meeting certain requirements. The producer must have had “regular, continuous and substantial involvement in the operation” for the previous 10 years; and

• The sale or exchange of depreciable property used in a business, to the extent it qualifies for a deduction under Internal Revenue Code sections 167 or 179.

Opposition

The Washington Policy Center explains that the IRS considers capital gains as income and is taxed as such.

“As the bill report and text of the bill makes clear, this is a tax on income,” Washington Policy Center Government Reform Director Jason Mercier told the Ways and Means Committee at a hearing. “This is not a surprise. Income taxes are on income.”

Mercier also stated other states’ departments of revenue consider their state capital gains taxes to be income taxes.

The Freedom Foundation, a nonprofit think tank with offices in Washington, stated lawmakers have called it an “excise tax” knowing that “targeted, unequal income/property taxes are subject to legal challenge.” The foundation also notes the bills’ sponsors have included an “emergency clause,” so if passed, the bill will take effect immediately and could not be placed on the ballot for a public vote.

“While the Freedom Foundation again stands ready to challenge any misguided and unconstitutional new tax in court if passed by the legislature, it’s always preferable that bad ideas simply never become law,” Maxford Nelson, director of labor policy, wrote.

Washington Retail Association Policy and Government Affairs Senior Vice President Mark Johnson told the Ways and Means Committee that SB 5096 would affect its members, 90 percent of which are small businesses. He added that the tax would be on top of existing taxes they already pay. HB 1496 would exempt small businesses if “a taxpayer or a family member must have materially participated in the operation of the business for at least five of the eight years preceding the sale or transfer.”

Jerry VanderWood, the chief lobbyist for the Associated General Contractors of Washington State, stated that SB 5096 would hurt the industry at the hearing.

“The construction industry and the good-paying jobs it provides are spurred in large measure by capital investments,” VanderWood testified. “Capital-gains taxes negatively impact the available stock of capital. Capital-gains taxes reduce the return that entrepreneurs and investors receive from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation.”

The Washington Farm Forest Association opposes the bill as well as Washington Cattle Feeders Association. Executive Director Jack Field told the committee that as currently written, the tax would apply to the sale of feeder livestock, which are typically held for less than a year.

“Every time they sold livestock, they’d be subject to the capital gains. The capital gains tax in this situation would create a substantial burden on Washington’s feeder families.”

No further action is planned on HB 1496, and the Ways and Means Committee held a second hearing on SB 5096 on Feb. 16. — Charles Wallace, WLJ editor

 

What do you think?

0
0
0
0
0

Load comments