Washington’s Supreme Court on Wednesday agreed the state can begin writing rules to collect its hotly contested capital gains income tax long before hearing arguments about whether Douglas County Superior Court Judge Douglas Huber’s ruling the measure unconstitutional should be reversed.
In a one-page announcement citing no reasons for accepting the state’s argument for issuing a stay of Huber’s ruling, the justices granted a motion filed in November by Washington State Attorney General Bob Ferguson allowing the state’s Department of Revenue to proceed with plans to impose the tax despite a looming Jan. 26 hearing on its merits.
The Democratically controlled Legislature last year passed, and Gov. Jay Inslee signed into law a measure that would impose a 7 percent tax on income from capital gains above $250,000 a year, such as profits from stocks or business sales.
Exceptions include the sale of real estate, livestock and small family-owned businesses.
The Washington State Constitution, however, requires that such taxes be applied uniformly and cannot exceed one percent without voter approval.
Backers of the tax describe it as an excise tax, but previous court decisions have consistently regarded income as property — which must be taxed at the same rate for everyone.
Freedom Foundation attorneys, working with the Seattle law firm Lane Powell, PC, filed a lawsuit challenging the tax within days of its passage, and Judge Huber last spring issued a ruling siding with their arguments. He wrote:
“As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on property pursuant to that same case law. This court concludes that ESSB 5096 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 percent 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 percent tax exceeds the 1 percent maximum annual property tax rate of 1 percent.”
Eric Stahlfeld, the Freedom Foundation’s chief litigation counsel, said, “The ruling puts an undue burden on Washington residents doing their end-of-year financial planning. Taxpayers must now prepare to set aside money to pay the state 7 percent tax on capital gains when they file their 2022 federal income tax return in 2023,” he said, “even though the Supreme Court very well may not rule on the constitutionality of the tax by the federal income tax deadline in April.”
In addition, taxpayers face far more difficulty in determining whether to take gains this year, or next.
“In his eagerness to start soaking Washington taxpayers, Bob Ferguson is creating chaos and confusion among Washingtonians preparing for the upcoming tax season,” said Freedom Foundation CEO Aaron Withe. “As usual Ferguson is playing with house money. It costs him nothing but the public’s tax dollars to fight the Washington constitution and the consistently expressed will of the people he is supposed to represent.”
This ruling shows far more concern for the convenience of the state’s tax-collecting apparatus than for its residents. The tax is just as unconstitutional now as it was a year ago.
Despite this perplexing development, the Freedom Foundation remains confident the justices will come to the same conclusion in January that Judge Huber did last spring and previous Washington courts have for nearly 100 years.