September 28, 2021

Washington capital gains tax hit with second lawsuit

3 min read

A nonprofit group has made good on its word to sue the state of Washington over a capital gains tax, claiming it’s unconstitutional.

Earlier this month, Gov. Jay Inslee signed a 7% tax on stocks, bonds, and other assets into law. The tax applies to realized gains totaling more than $250,000. It exempts retirement accounts and real estate but does apply to farmland despite calls from farm groups to exempt agriculture this past session.

The lawsuit was filed in Douglas County Circuit Court by the Opportunity for All Coalition on behalf of nine plaintiffs and the Washington State Farm Bureau. The plaintiffs all own non-exempt capital assets, which would net them $250,000 or more if sold. They are all members of the conservative Washington Policy Center think tank and own or owned farming operations in the state.

The Supreme Court of Washington has regarded income as property for decades. In 1933, it rejected a voter-approved measure to pass a state income tax on the grounds it violated the state constitution’s uniformity clause. The clause requires that “taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax…All real estate shall constitute one class.”

In lieu of a constitutional amendment, progressive tax advocates have fought an uphill battle to pass a tax on capital gains which its critics have interpreted as a tax on income. Capital gains are taxed as income by the IRS at the federal level.

Washington voters have given thumbs down to a graduated income tax ten times since 1933. Opportunity for All Coalition President Collin Hathaway, owner of the Guardian Roofing company and CEO of home service company Flint Group, says the capital gains tax is illegal and anti-business.

“The long game here is that they want to defy the will of the voters, who’ve rejected a state income tax ten times, and lay the groundwork for a statewide income tax that would impact most Washington residents,” Hathaway said. “This legislation is deceptive and harmful to Washington taxpayers and to businesses of all sizes.”

When it was introduced by state Sen. June Robinson, D-Everett, in January, the tax was sold by Washington Democrats as an excise tax well within the bounds of state law. Like state Sen. Joe Nguyen, D-West Seattle, many who voted for it believe the capital gains tax prevail in court for that very reason.

Excise taxes are typically applied at the point of sale. They’re usually based on price or volume with the state’s gas tax or cigarette tax. Nguyen says capital gains work the same way. 

“Capital gains is an excise tax,” Nguyen said. “You don’t pay it every single year. You only pay it when you sell it.”

The plaintiffs in the Opportunity for All Coalition’s lawsuit will be represented by former Washington attorney general and one-time gubernatorial candidate Rob McKenna. McKenna, who ran against Inslee in 2012, is a partner with the Orrick law firm. He expressed confidence the lawsuit would succeed.

“If this is an excise tax, it’s an illegal one,” McKenna said. “For example, Washingtonians who own businesses outside the state will pay this tax on gains from selling them, even though federal law prohibits a state from taxing activity in another state.”

The capital gains tax makes up a sizable chunk of the $59.2 billion state budgetsigned into law by Inslee this week. It’s projected to bring in $415 million for the state by 2023 from around 16,000 households. The tax is also shielded from the ballot box in 2021 thanks to a necessity clause added after it passed the Senate by a single vote in April. It also faces a lawsuit from the conservative Freedom Foundation on similar grounds.

Should the two lawsuits proceed, the fate of Washington’s capital gains tax may rest with the state’s supreme court again if appealed. The high court, which has passed several landmark decisions in 2021, has proven more than capable of surprising judgments.

This article was originally posted on Washington capital gains tax hit with second lawsuit

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