Capital Gains Income Tax Lawsuit Gets Its First Day in Court

Capital Gains Income Tax Lawsuit Gets Its First Day in Court

Capital Gains Income Tax Lawsuit Gets Its First Day in Court

This week, the lone judge for Douglas County Superior Court heard the first round of arguments in the Freedom Foundation’s lawsuit challenging the controversial capital gains income tax narrowly adopted by the legislature in April.

Gov. Inslee, who claimed on the campaign trail in 2012 that he would “veto anything that heads in the wrong direction, and the wrong direction is new taxes in the state of Washington,” signed the bill in May, stating at the signing ceremony that, “This could be the pinnacle of the greatest joy of the bills that I’ve signed as governor.”

Going into the hearing, Judge Brian Huber had five issues before him, two of which were decided at the hearing and three of which will be addressed at a later time.  

First, Huber decided to consolidate the lawsuit against SB 5096 filed jointly on April 28 by the Freedom Foundation and attorneys from Lane Powell PC on behalf of 10 Washington residents with a second challenge filed by the Opportunity for All Coalition (OFAC) on May 20. Going forward, the two cases will now be treated as one, as both Freedom Foundation and OFAC had requested.

Second, the judge granted a request by a group of farmers to file an amicus brief in support of the plaintiffs contending the tax is unconstitutional.

Third, a group of additional interests — consisting of the Washington Education Association (the statewide teachers union, which has been seeking to impose an income tax on Washingtonians for almost 90 years), the Edmonds School District, a parent of a public school student, a public school teacher and a child care provider — petitioned the court to be allowed to intervene in the proceedings as parties defending the tax alongside Attorney General Bob Ferguson’s office.

The parties contend they will receive some of the money collected from other taxpayers and therefore have an interest in defending the law, while the Freedom Foundation argued they do not meet the standards to be admitted as parties and could instead be permitted to file an amicus brief.

Huber indicated he would accept additional written arguments on the question from both sides and issue a written decision in the next week or so.

Fourth, the Attorney General’s Office had asked the judge to dismiss the case outright, contending that state law prevents taxpayers from challenging a tax in court until after they have paid the applicable tax and, in this case, no one will pay the new capital gains income tax until 2023.

However, the applicable state law specifically allows taxpayers to preemptively challenge taxes they allege to be “in violation of the Constitution of the United States or that of the state,” which is exactly what the plaintiffs in this case contend.

Finally, in the event the judge did not dismiss the case, Ferguson’s office had argued, without elaboration, that the “ends of justice” would be better served by transferring the case to Thurston County Superior Court. As the home to the state capital and state agencies, presumably Ferguson’s team believes it more likely to receive a ruling upholding the tax before a Thurston County judge.

While the Freedom Foundation was prepared to argue these issues at the hearing, Huber indicated he needed additional time to consider whether to dismiss the case and directed the parties to work out a time for a second hearing sometime in August.

As it has for years, the Freedom Foundation will continue to do its utmost to prevent the imposition of a new, unnecessary, harmful and precedent-setting income tax on Washington residents.

Director of Research and Government Affairs
As the Freedom Foundation’s Director of Research and Government Affairs, Maxford Nelsen leads the team working to advance the Freedom Foundation’s mission through strategic research, public policy advocacy, and labor relations. Max regularly testifies on labor issues before legislative bodies and his research has formed the basis of several briefs submitted to the U.S. Supreme Court. Max’s work has been published in local newspapers around the country and in national outlets like the Wall Street Journal, Forbes, The Hill, National Review, and the American Spectator. His work on labor policy issues has been featured in media outlets like the New York Times, Fox News, and PBS News Hour. He is a frequent guest on local radio stations like 770 KTTH and 570 KVI. From 2019-21, Max was a presidential appointee to the Federal Service Impasses Panel within the Federal Labor Relations Authority, which resolves contract negotiation disputes between federal agencies and labor unions. Prior to joining the Freedom Foundation in 2013, Max worked for and the Washington Policy Center and interned with the Heritage Foundation. Max holds a labor relations certificate from the University of Wisconsin-Madison and graduated magna cum laude from Whitworth University with a bachelor’s degree in political science. A Washington native, he lives in Olympia with his wife and sons.