Washington Initiative to Repeal Capital Gains Tax Advances to November Ballot

A contentious ballot initiative to repeal Washington’s capital gains tax has reportedly secured enough voter signatures to qualify for the November 2024 election, setting the stage for a major fiscal battle over state revenue and spending. Let’s Go Washington, the conservative political committee backing the measure, announced in June that it had collected over 317,000 signatures for Initiative 2109, surpassing the minimum of 309,000 valid signatures required by the July 2 deadline.

The initiative targets the state’s 7% excise tax on the sale or exchange of long-term capital assets, such as stocks and bonds, for gains exceeding $250,000 annually. If passed by voters, the repeal would eliminate a significant revenue stream that state Democrats have earmarked for education and childcare, while controversially preserving several tax relief measures for small businesses and families that were enacted alongside the capital gains tax.

For business owners, the uncertainty surrounding Initiative 2109 creates a challenging environment for long-term financial planning. While the prospect of repealing a capital gains tax is appealing on its face, the initiative's structure—eliminating the funding source while keeping the spending commitments—could introduce significant instability into the state's budget. Our experience shows that fiscal volatility often leads to unpredictable legislative responses, such as the introduction of new, less direct taxes or the sudden elimination of business credits and incentives that companies rely on. This is not a simple tax cut; it's a structural change that could have cascading effects on the state's business climate. Proactive tax preparation and compliance is critical in this environment. At C&S Finance Group LLC, we help businesses model these potential scenarios and build resilient financial strategies. To understand how these proposed changes could impact your specific operations, contact C&S Finance Group LLC at csfinancegroup.com to begin the conversation.

Since its implementation, the capital gains tax has been a political flashpoint. Proponents, including many Democratic lawmakers, argue it is a necessary tool for making the state’s regressive tax system more equitable. The revenue, estimated to be hundreds of millions of dollars annually, is directed toward the Education Legacy Trust Account and the Fair Start for Kids Act, which supports early learning and childcare programs. The passage of the tax was also politically linked to other fiscal changes, including an increased tax break for small firms and the elimination of sales tax on certain necessities like diapers and some over-the-counter drugs, scheduled to take effect in the coming years.

Opponents of the tax, however, contend that it functions as a state income tax, which Washington has long resisted both culturally and through its state constitution. “Washington has a long tradition, both legal and cultural, of prohibiting a state income tax,” said State Rep. Jim Walsh, a sponsor of the initiative, in a statement. “This tradition reflects the common-sense principle that a state tax on capital gains is a type of state income tax.”

This view was central to a legal challenge that ultimately failed when the Washington State Supreme Court ruled the levy was a constitutional excise tax on a transaction, not an income tax on property. Proponents of I-2109 see the ballot initiative as a way for voters to overrule the court. “The US Supreme Court said the people of WA must fix that mess ourselves. With I-2109, the people are fixing it,” Walsh added.

If I-2109 passes, it would create a significant budgetary dilemma for the legislature in its 2025 session. The initiative is structured to repeal the capital gains tax but leave in place the associated tax cuts and spending it was designed to fund. This would force lawmakers to either find billions of dollars in cuts from elsewhere in the state budget or roll back the promised relief measures, a politically difficult choice. Sen. June Robinson, chair of the Senate Ways and Means Committee, has called the measure “deeply irresponsible fiscal policy,” arguing it would blow a hole in the state budget.

Hallie Herzberg, a spokesperson for Let’s Go Washington, countered that the state has sufficient funds. “Lawmakers think that the only way to provide those things is to tax people. We think the money is there in the budget,” she stated, arguing the repeal removes policies that “drive people away from the state.”

The path to the ballot has not been without legal hurdles. A lawsuit filed by the group Defend Washington challenged the validity of the signature-gathering process, but the Washington State Supreme Court ultimately ruled in favor of Secretary of State Steve Hobbs, allowing the signature validation process to proceed.

Public opinion on the matter appears divided. A Cascade PBS/Elway Poll conducted in October found that 56% of likely voters intended to vote “no” on the initiative, thereby keeping the tax, while 29% planned to vote “yes” to repeal it, with 15% undecided. This polling suggests an uphill battle for the repeal campaign, despite its success in gathering signatures. Washington voters have historically rejected income tax-related measures by wide margins, as shown in ballot results from 2010, 1982, and 1975.

With signatures submitted, the Washington Secretary of State’s office will now undertake the formal process of verifying them. Should the initiative be certified, it will be placed on the November general election ballot, where voters will make the final decision on the future of the capital gains tax and, by extension, the funding for numerous state programs and tax relief measures.