OLYMPIA, Wash. (CN) — The Washington Supreme Court found the state’s capital gains tax constitutional Friday, upholding it in a 7-2 ruling on a contentious bill previously overruled by lower courts and passed into law by Democrats in 2021.
The measure’s constitutionality was brought to the high court by two groups claiming the tax was a property tax on income, which violated the privileges and immunities clause of the state constitution and the dormant commerce clause of the U.S. Constitution.
In March 2022, Douglas County Superior Court Judge Brian Huber ruled against the capital gains tax voted into law by progressives in 2021. The judge stated that the tax violated the state constitution’s uniformity requirement for taxes by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 while imposing no tax for individuals with capital gains below the $250,000 threshold.
The tax is constitutional as an excise “because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves," ruled Justice Debra L. Stephens in the high court’s decision.
“The capital gains tax is a valid excise tax under Washington law. Because it is not a property tax, it is not subject to the uniformity and levy requirements of article VII, sections 1 and 2 of the Washington Constitution,” she wrote.
Stephens added: “In light of this holding, we decline to interpret article VII or to reconsider our decision in Culliton. We further hold the tax is consistent with our state constitution’s privileges and immunities clause and the federal dormant commerce clause. We reverse the superior court order invalidating the capital gains tax and remand for further proceedings consistent with this opinion.”
In a dissenting opinion, Justice Sheryl Gordon McCloud found capital gains are income, and in Washington, income is property.
“This capital gains tax is not triggered by each and every sale of a qualifying capital asset, as one might expect of an excise tax. And this capital gains tax is not measured by gross income or by the full value of the asset, as one might expect of an excise tax,” McCloud wrote. “Rather, the new capital gains tax is triggered only if the taxpayer realizes a gain from the sale of the asset, and the measure of the tax is the amount of gain realized. Under our controlling cases, the new capital gains tax is an income tax — not an excise tax.”
The justice pointed out that in Washington, the constitution limits property tax to one percent annually, yet Washington Legislature enacted a law that taxes capital gains seven times over.
“Since the capital gains tax is a property tax, it is subject to the one percent levy cap contained in article VII, section 2,” McCloud wrote. “This tax clearly violates that provision because it imposes a seven percent levy on a taxpayer’s Washington capital gains. I would affirm the trial court’s decision that the tax is unconstitutional on that ground and decline to reach the other constitutional issues raised by the petitioners.”
News of the Supreme Court’s decision spread fast around the state Friday, with a statement quickly coming in from Washington Governor Jay Inslee, a Democrat.
“For 134 years, Washington state has been waiting for the day when a fairer tax system came about, one where working people were not carrying an inequitable share of the burden,” Inslee said. “Today is that day. Washington’s capital gains tax helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents.”
Washington is unique in that it is one of the few U.S. states without personal or corporate income tax and relies almost exclusively upon sales, property and business taxes. Because of this, Justice Stephens points out, some of the lowest earners in the state bear the heaviest tax burdens due to sales taxes and the lack of graduated income tax, leading to them “paying nearly six times more in state taxes as a percentage of personal income than Washington’s wealthiest residents.”
“This burden falls disproportionately on Black, Indigenous, and People of Color (BIPOC), who are overrepresented in low-income brackets,” Stephens wrote.
Narrowly passed in April 2021, the capital gains tax set out to make the state’s tax system more equitable, following suit with 41 other states and the District of Washington that also impose 7% capital gains taxes on the sale or exchange of certain long-term capital assets, such as stocks or bonds.
Additionally, the state Legislature wanted to ensure it would provide children with high-quality education programs, promising to deposit the first $500 million of each tax year to a legacy trust account to support K-12 education for early learning and childcare programs. All additional revenue collected after would be donated to a school construction account funding the construction of school facilities.
Washington State Department of Revenue Acting Director John Ryser announced Friday that collections on the tax will proceed as planned. The tax went into effect on Jan. 1, 2022, and the first payments are due on or before April 18.
“Now that the legal challenges have been settled, the Department of Revenue will continue to uphold its statutory obligation to collect the capital gains tax,” Ryser said.
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