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Washington state Supreme Court clears way for state to collect capital-gains tax

Nov. 30, 2022 Updated Wed., Nov. 30, 2022 at 9:45 p.m.

The Temple of Justice, where the state Supreme Court is housed, in Olympia.  (By Albert James / The Spokesman-Review)
The Temple of Justice, where the state Supreme Court is housed, in Olympia. (By Albert James / The Spokesman-Review)
By Claire Withycombe Seattle Times

OLYMPIA – Washington can collect a new state capital gains tax, following a Washington Supreme Court order Wednesday that comes as the justices are about two months from hearing a challenge to the tax’s constitutionality.

The state court issued a stay Wednesday on a lower-court ruling from March that called the tax unconstitutional.

The stay allows the Department of Revenue to administer and collect the 7% tax on the sale and exchange of assets like stocks and bonds, pending the court’s decision. The tax applies to profits over $250,000. The first returns are due in April.

A department spokesperson said the stay would allow the agency to put the tax into place, and payments would be refunded if the state Supreme Court finds the law unconstitutional.

“While the stay does not resolve the issues surrounding the constitutionality of the capital gains tax, granting it protects potential taxpayers and preserves the agency’s ability to effectively administer and implement the tax and meet statutory obligations pending a final decision from the Washington Supreme Court,” Department of Revenue Communications Manager Mikhail Carpenter said in a statement Wednesday.

An online system will be available for taxpayers to report and pay the tax, Carpenter said, adding, “If the Court eventually finds the statute to be unconstitutional, any tax payments received will be promptly refunded with interest.”

On Jan. 26, the state Supreme Court will hear oral arguments challenging the tax, which state lawmakers passed in 2021.

In March, Douglas County Superior Court Judge Brian Huber ruled the tax unconstitutional. In an order, He wrote the tax, among other things, violated the state constitution’s uniformity requirement for taxes.

“It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000,” Huber wrote, but imposes “zero tax on capital gains below that $250,000 threshold.”

The state moved for a stay of that ruling.

Washington has no income tax. While supporters of the new capital gains tax say it’s an excise tax that will support public services in a state with a tax system that burdens low-income people, critics and challengers say the policy amounts to an unconstitutional income tax.

“Washington is the only entity in the world that refers to a capital-gains tax as an excise tax,” said Jason Mercier, director of the Center for Government Reform at the Washington Policy Center, a conservative think tank. “Doesn’t matter if you go to the other 49 states, doesn’t matter if you go to the IRS, the federal government, or other countries in the world. You’ll get the same answer. It’s an income tax, because that’s what’s being taxed.”

“Allowing capital gains tax preparations go forward is the right step for Washington’s students and parents,” said Treasure Mackley, executive director of Invest in WA Now. “The lawsuit challenging the capital gains tax is just a delay tactic by a small group of millionaires who refuse to pay what they owe. We cannot afford to put the self-interests and fortunes of the super-rich ahead of our communities.”

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