Washington Supreme Court to hear capital gains income tax lawsuit

Washington Supreme Court to hear capital gains income tax lawsuit

Washington Supreme Court to hear capital gains income tax lawsuit

The Washington State Supreme Court today expedited the ultimate resolution of the Freedom Foundation’s lawsuit challenging the capital gains income tax bill passed by the Legislature in 2021 by announcing it will accept direct review of the case, effectively allowing the matter to bypass the court of appeals.

Washington has long benefited from its status as one of the few states without an income tax, though attempts by the political Left to impose one have continued unabated for about 90 years. Voters have rejected income tax proposals at least 11 times and courts have consistently struck down legislatively enacted income taxes for violating the state constitution.

The most recent effort came when majority Democrats in the Washington State Legislature passed SB 5096 over bipartisan opposition last year, creating a 7 percent tax on income from certain capital gains. The Freedom Foundation, in partnership with tax attorneys from Lane Powell PC in Seattle, immediately filed litigation on behalf of 10 Washington taxpayers challenging the new tax in Douglas County Superior Court.

Following a series of hearings, Judge Brian Huber struck down the law in March 2022, agreeing that it violated the state constitution.

Attorney General Bob Ferguson’s office, which is defending the tax in court, responded by appealing Judge Huber’s ruling directly to the Washington State Supreme Court. While the Freedom Foundation argued it would have been most appropriate for the case to proceed along a typical path through the Division III Court of Appeals, the Supreme Court agreed to accept direct review and skip over the appeals court.

In an unusual but not unprecedented move, the Supreme Court accepted the case after the state and intervening defendants, including the Washington Education Association, had submitted their full briefing but before the plaintiffs were permitted to do so.

Procedural matters aside, the plaintiffs continue to have the weight of the legal arguments on their side.

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.

Assuming the current Supreme Court abides by 90 years of precedent, the latest income tax gambit will also be struck down.

In a statement, Eric Stahlfeld, the Freedom Foundation’s chief litigation counsel, explained that,

“Despite a century of court rulings recognizing that our state constitution requires taxes on income to be equally applied and can’t exceed one percent without voter approval, Attorney General Ferguson and the state legislative majority are brazenly attempting to impose a selective capital gains income tax on Washington entrepreneurs. The state enacted this illegal tax in 2021 knowing every step of the way that it was an intentional attempt to circumvent the state constitution. But the constitution hasn’t been amended, the law is still the law, and the Freedom Foundation is confident the Supreme Court will again strike down this latest punitive tax scheme by greedy politicians in Olympia.”

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 WashingtonVotes.org 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.