Douglas County judge strikes down capital gains income tax

Douglas County judge strikes down capital gains income tax

Douglas County judge strikes down capital gains income tax

Late Tuesday, Douglas County Superior Court Judge Brian Huber struck down the capital gains income tax passed by the Washington State Legislature in 2021.

While not the last word, the ruling was a resounding early victory for the Freedom Foundation — which filed the first lawsuit challenging the tax in partnership with attorneys at Lane Powell PC in Seattle — and all who value the state constitution and want to keep Washington income tax free.

Democrat majorities voted to pass SB 5096 in 2021 over bipartisan opposition not because the state needed additional funds — the state’s revenue from existing taxes has steadily increased in recent years without even taking into account the additional billions in COVID relief received from the federal government — but because of the insatiable desire of politically-powerful, government-dependent liberal interest groups, like government unions, for more and higher taxes.

Attempts to impose an income tax on Washington residents have a long track record of failure due to consistent opposition from voters, who have rejected such taxes at least 11 times in the past 90 years, and legal challenges.

Article VII of the Washington State Constitution requires that taxes on “property” be “uniform” and not exceed 1 percent, unless three fifths of voters approve a higher rate. Since the Washington State Supreme Court’s 1933 Culliton decision, state courts have considered “income” to be a type of “property,” meaning taxes on income must abide by the constitution’s uniformity and 1 percent cap requirements.

While a flat, 1 percent income tax would pass constitutional muster, liberals want a high, punitive tax that targets select Washingtonians.

Rather than pass a constitutional income tax or amend the constitution, liberals hoped to avoid legal problems with SB 5096 by labeling the 7 percent tax on capital gains income an “excise tax” on the privilege of selling capital assets.

But Judge Huber saw through the Legislature’s sleight-of-hand, writing in his 12-page opinion that,

“Rather than merely relying upon whatever label or characterization the State has used to describe a tax statute, it is the State’s choices about ‘who is being taxed, what is being taxed, and how the tax is measured’ that determine its ‘incidents’ and whether it should be deemed a tax on income as opposed to an excise.”

Given that the tax imposed by SB 5096 was by nature and definition “properly characterized as an income tax,” Judge Huber concluded the tax,

“…violates the uniformity and limitation requirements of article VII, sections 1 and 2 of the Washington State Constitution. It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold. It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”

Attorney General Bob Ferguson, whose office defended the tax law, announced that he intends to appeal the ruling. Under court rules, his office has one month to do so.

However, it is not presently clear whether the Attorney General will follow the usual course and appeal to the Division III Court of Appeals or seek to go directly to the Washington State Supreme Court.

When the City of Seattle adopted a graduated income tax ordinance in 2017, the Freedom Foundation and Lane Powell similarly challenged the law and secured a victory before the King County Superior Court. In that case, the city petitioned the Supreme Court for direct review of the case but, after sitting on the city’s petition for more than a year, the Supreme Court declined to get involved early and referred the litigation to the Court of Appeals. Six months later, the Court of Appeals also found the tax to be unconstitutional. The city appealed to the Supreme Court a second time which, after another seven months, declined to hear the case.

Regardless of how long it takes for the litigation over SB 5096 to be resolved, this week’s decision gives income tax opponents the high ground from which to fight the battles to come, and the Freedom Foundation remains committed to defending Washingtonians from this unnecessary, unconstitutional and counterproductive tax.

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.