Freedom Foundation

Freedom Foundation renews threat to file lawsuit after House Dems propose capital gains tax

(OLYMPIA, Wash.) — If the Washington State Legislature enacts a capital gains tax proposal like the one unveiled on Monday by Democrats in the House of Representatives, the measure will have to survive a legal challenge from the Freedom Foundation.

The Olympia-based free-market think tank on Tuesday renewed its pledge from previous years to file a lawsuit over any capital gains income tax passed by the Democrat-controlled Washington State Legislature during its 2019 legislative session.

Despite record state tax revenues, House Democrats this week unveiled a proposal asking for a 9.9 percent tax on capital gains beyond a certain threshold — a rate even more audacious than the 9 percent tax proposed last fall by Gov. Jay Inslee.

“Graduated taxes on income, including income from capital gains, are clearly forbidden under the Washington State Constitution,” said Freedom Foundation CEO Tom McCabe. “That was true last year; it’s true now; and, unless the constitution is amended, it will be true every time it’s tried.”

The Washington State Supreme Court ruled in 1933 that income — including capital gains — is considered property and, consequently, subject to the same restrictions as other property taxes.

The state constitution requires property be taxed at the same rate for all Washingtonians, which is why the court ruled in 1933 that a graduated-rate income tax is unconstitutional.

A legislative proposal for a capital gains income tax in 2018 sought to impose a flat rate of 7 percent, but the narrow Democratic majorities were unable to muster the support needed to pass it.

“Supporters of a capital gains tax know it’s unconstitutional,” McCabe said, “and they also know the residents of this state will never approve an amendment to that effect. So their plan is to pass a bad bill and send the question to the Washington Supreme Court, hoping the justices will do their dirty work for them.”

Washington voters consistently reject tax increase proposals at the ballot and have voted down income tax proposals with regularity. But rather than taking the hint and living within their means, lawmakers continue looking for a shortcut that bypasses the public.

Temporarily, at least.

“It’s about time our lawmakers got a lesson in economics,” McCabe said. “If you impose a tax on capital gains, people aren’t just going to shrug their shoulders and pay it. They’re going to take their incomes and their productivity to a state that rewards success rather than punishes it.

“If it takes a lawsuit to bring that message home,” he said, “the Freedom Foundation is prepared to oblige them.”

The Freedom Foundation — a nonpartisan, nonprofit policy organization — followed through on a similar promise by filing a lawsuit in 2017 against the city of Seattle after the city council voted to impose an income tax on the city’s high earners.

A King County Superior Court judge struck down the tax as illegal in Nov. 2017, though the city’s appeal is ongoing.

Contact: Eric Stahlfeld