Washington Supreme Court agrees to review capital gains lawsuit

OLYMPIA – The state Supreme Court has agreed to hear a lawsuit regarding Washington’s new capital gains tax.

A Douglas County Superior Court judge in March struck down the new tax, which opponents have called an income tax and therefore unconstitutional under state law.

The state appealed the decision. The Supreme Court on Wednesday agreed to hear the case, Quinn v. State of Washington, and bypass the court of appeals. There is no oral argument date set for the case, but it is likely to happen later this fall.

The Legislature last year passed a 7% tax on the sale of stocks, bonds, businesses and other investments, if the profits exceed $250,000 annually. Exceptions include the sale of real estate, livestock and family-owned businesses.

The tax went into effect in January, but payments won’t be made to the state until 2023.

It is estimated to bring in about $415 million that the state has set aside for child care and early learning. Supporters of the tax, including school districts, the Washington Education Association and others, say the tax could help make the state’s tax system less regressive, which would mean lower-income taxpayers pay a smaller share of their income on taxes than high-earners.

Opponents of the law, represented by former Attorney General Rob McKenna, say a capital gains tax is an income tax.

The 14th Amendment of the state’s constitution, approved in 1930, says all taxes in the state must be “uniform upon the same class of property.” Property is defined as “everything, whether tangible or intangible, subject to ownership.”

Since then, the Supreme Court has shot down attempts from the Legislature to pass various forms of an income tax, saying it is unconstitutional because income is considered property.

This lawsuit could be another chance for the court to rule on whether the tax is considered an income tax and if an income tax is constitutional in Washington.

In his ruling, Douglas County Superior Court Judge Brian Huber wrote the capital gains tax is “properly characterized as an income tax … rather than as an excise tax as argued by the State.”

The state argued in a hearing earlier this year that the tax does not apply when you own a stock, bond or other capital asset, such as a property tax would. It only applies when you sell it, making it an excise tax, which is typically levied on specific goods like cigarettes or alcoholic beverages. Huber rejected that argument, saying the tax meets the definition of property tax by being “absolute and unavoidable” in a number of scenarios in which the sale or transfer of the capital asset would not be voluntary.

Opponents of the tax said they were confident the supreme court will again strike down the tax.

“Despite a century of court rulings recognizing that our state constitution requires taxes on income to be equally applied and can’t exceed 1 percent without voter approval, Attorney General Ferguson and the state legislative majority are brazenly attempting to impose a selective capital gains income tax on Washington entrepreneurs,” said Eric Stahfeld, chief litigation counsel for the Freedom Foundation, one of the groups suing the state.

Supporters of the tax said they were pleased the supreme court will provide a timely review of the trial court’s decision.

“Most people want super rich Washingtonians to pay what they owe our communities for schools, child care, and much more,” said Treasure Mackley, Executive Director of Invest in WA Now, a coalition of supporters of the tax. “Millions of students, whether in preschool, high school, or technical college, are depending on the $500 million/year from this tax on the super-rich.”