State Supreme Court hears capital gains tax arguments in hearing
Jan. 26, 2023 Updated Fri., Jan. 27, 2023 at 8:04 a.m.
OLYMPIA – The state Supreme Court on Thursday heard arguments in one of the most controversial cases it’s seen in recent years – the capital gains tax.
Attorneys for the state and for the plaintiffs in the case, Chris Quinn v. State of Washington, argued in front of the court’s nine justices in what will be another ruling in the decadeslong fight over the constitutionality of income taxes in Washington.
It could take months, though the state has asked for an expedited turnaround because the tax is due in April. The Legislature will soon start writing its two-year budget, which will likely rely on the capital gains tax to fund.
Supporters say the tax would help lower-income taxpayers pay a smaller share of their income on taxes than high-earners. Opponents of the tax say it is an income tax, which remains unconstitutional in Washington.
The court will have to determine whether the new tax is an income tax or an excise tax. If it is determined to be an income tax, the court will have to decide whether it is allowed under the state Constitution.
“There is nothing new under the sun when it comes to this issue,” former Republican Attorney General Rob McKenna argued Thursday. “Trying to call an income tax an excise … has been tried several times in this state by the state Legislature, and it’s been struck down every time.”
If upheld, the new law will impose 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.
Fewer than 1 in every 1,000 residents will likely pay the tax. It’s estimated to bring in about $500 million that the state has set aside for child care and early learning.
A Douglas County Superior Court judge in March struck down the new tax, which he wrote in his ruling was “properly characterized as an income tax … rather than as an excise tax as argued by the State.”
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.”
The Supreme Court has shot down attempts from the Legislature and voters to pass various forms of an income tax. In the 1933 Culliton v. Chase case, the state Supreme Court struck down a voter-approved graduated income tax because it considered income to be property, which needed to be taxed uniformly.
The capital gains tax does not apply merely by owning capital assets, attorney for the state Noah Purcell said. Instead, it is applied once they are sold. The tax also only applies to the amount of gain from the sale, not the value of the asset itself.
“A person can own limitless stocks or bonds, can own them for years. They can increase dramatically in value,” Purcell said. “The person owes no tax that whole time. It is only when they sell the assets that they owe that tax.”
But McKenna, who represented the challengers in the case, said every taxing authority in the country treats a capital gains tax as an income tax.
In their brief, attorneys for the tax challengers say a property tax is one that falls upon the owner simply because they own the property, and an excise tax is imposed on a voluntary act of the taxpayer. The capital gains tax does not apply to every sale or transfer of capital assets, according to the plaintiffs, and an individual doesn’t need to voluntarily act to be subject to the tax.
They also argue the tax is not uniform because it is imposed on individuals but not corporations, which sell or exchange capital assets.
“The label of excise does not match how the tax actually operates or functions,” attorney Callie Castillo argued Thursday.
Attorney Paul Lawrence, who represented school districts and the Washington Education Association who joined the state in the case, told the court that they should treat the tax as an excise tax. If they do not, they should look to overturn the 1933 case.
Lawrence encouraged the court to look at the history of the state’s 14th Amendment, which he said was enacted by the Legislature to give lawmakers greater leeway when writing taxes. In addition, previous court rulings on the issue have been “incredibly inconsistent with the treatment of income,” he said.
In overturning previous cases, the court would give back the inherent power the Legislature has to make taxing decisions in a fair and equitable way, Lawrence said.
Washington could have an income tax, McKenna said, but right now it must be uniform for all residents. To change that, lawmakers would have to make a constitutional amendment, which would require two-thirds approval from the Legislature and a vote of the people.
Editor’s note: A previous version of this article misrepresented McKenna’s view that every taxing authority considers a capital gains tax an excise tax. He said every taxing authority considers a capital gains tax an income tax.
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