Capital gains tax upheld by WA state Supreme Court

The Washington state Supreme Court has upheld the embattled capital gains tax as constitutional in a 7-2 ruling released Friday morning.

In an opinion written by Justice Debra L. Stevens and signed by the majority in Quinn v. State of Washington, she wrote that “the capital gains tax is a valid excise tax under Washington law.” Because capital gains is not a property tax, “it is not subject to the uniformity and levy requirements” of article 7, sections 1 and 2 of the Washington Constitution, she wrote.

“We further hold the tax is consistent with our state constitution’s privileges and immunities clause and the federal dormant commerce clause,” Stevens wrote. “We reverse the superior court order invalidating the capital gains tax and remand for further proceedings consistent with this opinion.”

Justices also declined to reconsider their decision in the 1933 case Culliton v. Chase, which overturned a graduated state income tax that had been approved by an initiative of the people. That ruling also said that income is considered property and as such is barred from taxation under the state’s constitution.

The two state Supreme Court Justices to dissent against the majority opinion were Charles W. Johnson and Sheryl Gordon McCloud.

In their dissent, McCloud wrote that the tax violates Article 7, Section 2 of the state’s constitution.

“Deciding whether to retain our regressive tax structure or to replace it with a more equitable one is up to the legislature through legislation and the people through constitutional amendment,” McCloud wrote.

Washington has one of the most regressive tax structures in the U.S., and the capital gains tax bill was introduced to help balance the current tax code. Democrats have said it is aimed at taxing only the richest Washingtonians. The legislation to create the capital gains tax passed the legislature and was signed into law by Gov. Jay Inslee in 2021.

The tax has faced intense criticism since its introduction and passage. Washington State Republicans at the time warned that the case would eventually wind up in the courts because they believed the tax is an income tax, which is unconstitutional in Washington.

The law imposed a 7% tax on profits over $250,000 from the sale of assets including stocks, bonds, and mutual funds. 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.

Gov. Jay Inslee was thrilled with Friday’s ruling.

“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,” he said in a statement. “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.

“It is gratifying as governor to join so many Washingtonians in this historic victory today, one that has been elusive in the face of years of opposition from powerful interests. I want to thank the court for their timeliness in considering this case, and all the legislators and advocates who spent nearly a decade working tirelessly on this policy to make our state fairer and more equitable.”

Inslee’s office pointed out that low-income Washingtonians pay 17% of their income in taxes, while middle class individuals pay 11% and the wealthiest pay just 3%. Washington now joins 41 other states and the District of Columbia in having capital gains taxes, Inslee’s office said.

In March 2022, the capital gains tax was ruled unconstitutional by a Douglas County Superior Court judge who said the tax was “properly characterized as an income tax” pursuant to applicable Washington case law. The case was appealed by the state.

In January, both sides presented oral arguments to the state Supreme Court. Because the Legislature adjourns April 23, counsel for the appellants requested that Justices release a decision in the case prior to that date so that lawmakers would know whether they had revenue from the capital gains tax to implement in the next two-year budget.

The decision Friday came after Senate budget writers released their budget proposals this week for the next biennium, which include proposed spending from capital gains tax revenue.

Groups such as the Washington State Labor Council, SEIU, and Washington Community Alliance all submitted amicus briefs in support of the capital gains tax.

The Washington Policy Center, the Tax Foundation and Association of Washington Businesses all signed amicus briefs against the capital gains tax.

The capital gains tax went into effect in January 2022, but payments on those taxes won’t be due until April of this year.