The Threat of a State Capital Gains Tax in Washington

As everyone knows, Washington has no state personal income tax while Oregon imposes a 9% personal income tax on all income earned in the state. Oregon makes no distinction between sources or kinds of personal income in applying its tax. The net effect of this difference can be dramatic. For instance, sale of a capital asset such as shares of corporate stock worth $10 million will result in a $900 thousand Oregon income tax obligation but will result in no Washington state income tax.

There is thus a great incentive for Oregon residents to change their residence to Washington for tax purposes before selling a substantial capital asset such as their equity in a successful business. There is also a great incentive for the state of Oregon to discover sellers of such assets who have failed to legally make a change of residence before making such sales. Our firm frequently advises clients on what they must do in order to change their state of legal residence from Oregon to Washington in order to immunize their capital assets from Oregon state income tax before they are sold. Surely God created the Columbia River to further insulate Washington from the contagion of state personal income tax.

Now, however, Sebastian Johnson at the Tax Justice Blog, reports that Washington’s Governor intends to end the attraction of Washington’s tax policy for out of state capital in 2015. The report here is that Governor Jay Inslee has just announced a budget proposal to impose a 7% capital gains tax on capital gains earnings above $25,000 per individual and $50,000 per couple. The proposal would thus impose a Washington state capital gains tax almost equal to Oregon’s income tax on capital gains.

Of course it remains to be seen whether this proposal ever becomes law.

© 12/31/2014 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.

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