OLYMPIA — Farm groups are lobbying to amend a capital gains tax proposal, hoping to head off a tax hit for cattlemen and retired farmers.

As proposed by Gov. Jay Inslee and introduced by Democrats in the Legislature, active farmers and ranchers who sell their land would be exempted from the tax on gains from the one-time sale of assets.

To qualify for the exemption, however, the producer must have had “regular, continuous and substantial involvement in the operation” for the previous 10 years.

To figure out what that means, the state Department of Revenue would rely on a federal tax law regarding “material participation,” a term that the Internal Revenue Service offers guidance to interpret.

Washington Farm Bureau director of government relations Tom Davis said he’s concerned that the state would apply the exemption in a way that hurts farmers who had leased their land or were semi-retired before they sold.

“They have one job at the Department of Revenue, and that’s to make sure everyone is paying as much in taxes as possible,” he said Friday.

Inslee and other Democrats who support the tax say it will affect a small number of wealthy people.

The tax would exempt $200,000 in capital gains for single filers and $400,000 for joint filers. The tax on real property would be 7% and the tax on other capital gains would be 9.9%.

Some 7,000 taxpayers would pay a total of $835 million the first year, the Department of Revenue estimates.

The taxpayers could include feedlots because the tax applies to income from selling cattle, horses or breeding stock held for less than a year.

At a hearing Thursday, Eastern Washington rancher and cattle feeder Camas Uebelacker told the House Finance Committee that cattle in his feedlot stay for 220 to 240 days, making him subject to the tax.

Even cattle held for more than a year would be taxed if the rancher had an off-farm job that he earned more at than ranching.

“Guys starting a ranch might have to work in town for awhile,” Washington Cattlemen’s Association lobbyist Mark Streuli said in an interview.

“For our guys, it’s an income tax. And when you apply it to beef cattle, it’s a tax on food,” he said.

The capital gains tax is one of Inslee’s major proposals for this legislative session.

House Democrats propose to funnel half of the revenue into infant care, pre-schools and subsidized child care. The tax is projected to raise about $1.8 billion per two-year budget cycle.

The tax was introduced in the House by Rep. Tana Senn, a Mercer Island resident, where the per capita income in 2019, according to the Census Bureau, was $90,130.

“I represent a district where many of my constituents will be impacted by this capital gains tax. I have run on this issue and won repeatedly,” she said.

Anti-tax activist Tim Eyman said a capital gains tax will “supercharge” his tax-limiting initiatives.

“Voters understand that once this Pandora’s box is opened, an income tax on some of us will become an income tax on all of us,” he said.

Eyman called the promise to divert half the money for young children a “fig leaf.”

“There’s no such thing as ‘dedicated revenue,'” he said. “Once you start collecting the revenue you can spend it on anything you want.”