Superior Court Judge hears arguments in capital gains tax case
A Washington state Superior Court judge in Douglas County heard oral arguments Friday in the case to determine whether the state’s capital gains tax is an excise tax or an income tax, which is unconstitutional in the state.
Two lawsuits were filed against the state: Clayton v. Washington and Quinn v. Washington. Both have joined together.
Washington Solicitor General Noah Purcell led with opening arguments. He said that every theory that a capital gains tax is unconstitutional presented by the plaintiffs has previously been struck down by the Washington State Supreme Court and the U.S. Supreme Court. He said the court should uphold precedent and the law enacted by the legislature.
The most difficult cases, Purcell said, are ones that challenge laws because plaintiffs have to show two things: Plaintiffs have to convince courts without a reasonable doubt that the law violates the constitution, and plaintiffs have to convince the court that there are no circumstances in which the law can be constitutionally applied. He alleged that the plaintiffs have so far failed to do both.
“Accepting their argument would require invalidating taxes that our State Supreme Court has upheld for decades,” Purcell said. “Faithfully applying precedent leads to the clear conclusion that the capital gains tax is an excise tax.”
Rob McKenna, former Washington State Attorney General, argued on behalf of the plaintiffs that the legislature had adopted another “excise tax workaround,” and said measures similar to this have been tried and rejected before. Under federal law, capital gains are characterized as income tax, he said.
“Although indistinguishable in every way from the federal income tax on which it’s modeled, the legislature has labeled the new capital gains tax an excise tax,” McKenna argued.
“This is not the first time the legislature has attempted to evade our constitution’s limitations on income taxes and property taxes by relabeling them excise taxes,” he said.
Superior Court Judge Brian C. Huber concluded the hearing without a ruling, telling the court that he would have a written ruling maybe sometime in the next two weeks.
Parents, teachers and the Edmonds School District signed on to intervene in the case in July 2021, arguing too that the tax is an excise tax. They noted that the capital gains tax “will provide significant funding for public education in Washington, including for K-12 classrooms, special education, early learning, and school buildings.”
Additionally, business owners and community leaders in Wenatchee filed an amicus brief in support of the state’s arguments in December.
Other amicus briefs were previously filed in support of the plaintiffs, including one filed by groups such as the National Taxpayers Union and the Washington Policy Center. Another amicus brief was later filed by the Building Industry Association of Washington and the Washington Cattlemen’s Association.
The capital gains tax, which was aimed at taxing only the richest Washingtonians, passed the legislature in 2021. Lawmakers at the time were aware that the legislation would eventually find its way into the courtroom. The law imposed a 7% tax on profits over $250,000 from the sale of assets including stocks, bonds, and mutual funds. As Purcell noted in arguments, this means that if someone made profits of $300,000 from selling stocks, they would pay 7% in taxes on $50,000 of those profits.
The first $500 million in revenue from the tax would go into the state Education Legacy Trust Account. The remainder of that would go into the Common School Construction Account.
Farms, real estate, retirement, and many other accounts are exempt from the capital gains tax. Additionally, less than 8,200 people in Washington state would have to pay the capital gains tax, according to the Washington State Budget and Policy Center.
Ballot initiatives have been introduced since the legislation was passed as well.
However, an internal memo from GBAO Strategies showed an early poll analysis regarding those initiatives to repeal the capital gains tax. Fewer than 50% of surveyed Washington voters support Tim Eyman’s “We Don’t Want Our Income Taxed” ballot initiative. Another ballot initiative has slightly more support than Eyman’s initiative in early surveys, but is still finding its support at only 49%.
The capital gains tax went into effect on Jan. 1, but payments aren’t due until taxes become due in April 2023.
This story was originally published February 4, 2022 at 2:14 PM with the headline "Superior Court Judge hears arguments in capital gains tax case."
