DORI MONSON

Court battle over newly-passed capital gains tax could rewrite Washington’s tax code

Apr 26, 2021, 4:19 PM | Updated: Apr 27, 2021, 11:27 am
Capital gains tax, income tax...
(Photo by Tim Boyle/Getty Images)
(Photo by Tim Boyle/Getty Images)

The Washington Legislature approved a 7% capital gains tax over the weekend, setting the stage for what’s sure to be drawn-out court battle over whether or not the tax is legal under the state’s constitution.

State lawmakers OK controversial capital gains tax

SB 5096 would impose a 7% tax on capital gains above $250,000 for all to bring in an estimated $415 million in 2023, its first year. The text of the bill describes it as an excise tax on the sale of stocks, bonds, and other assets above $250,000, excepting real estate and family-owned small businesses.

While supporters of the bill have touted it as a necessary step toward balancing Washington’s tax code, opponents have argued that it’s a poorly-disguised income tax, and as such, isn’t legal.

“Their own bill says this tax applies not to sales, but to the income reported to the IRS on your federal income tax return for capital gains — that’s what the bill says,” Washington Policy Center Director Jason Mercier told KIRO Radio’s Dori Monson Show. “This is why every state in the country, the Congressional budget office, the IRS, and every tax professional will tell you the same thing: Capital gains are income, and taxes on them are income taxes.”

That’s also based on a landmark 1936 case, in which the state Supreme Court ruled the state constitution required all property to be taxed at the same rate. The court said income counted as property, striking down a graduated income tax rate earlier approved by voters.

So, why did Washington lawmakers pass the tax in the first place? Mercier believes that the bill was actually designed to be challenged in court, in a bid to see that precedent overturned.

“What’s the goal of this? Well, we know from public records, the goal of this is to set up a lawsuit, which they’re about to get,” he described. “They’re doing this because they want to see if the Supreme Court will overturn numerous rulings saying that you own your income.”

“If that happens, then there can be a broad based graduated income tax without a constitutional amendment, something the voters have already rejected six times,” he added.

As for whether or not the state Supreme Court will rule in favor of the tax, that much is unclear. “Anything is possible,” Mercier notes, while also pointing out how that very same court would have to overturn “the plain language of Washington’s constitution adopted by voters in 1930.”

Washington Rep: Capital gains tax is just ‘parity in the tax code’

In a March editorial for The Seattle Times, though, University of Washington law professor Hugh Spitzer argued that the bill clearly presents itself as an excise tax on the “voluntary activity” of selling an asset, “rather than a tax on the asset itself.”

Because of that, he believes that there’s a high likelihood the state Supreme Court will interpret it the same way, and that anyone seeking to challenge it on the grounds that it’s actually an income tax “should be careful about what they wish for.”

According to Spitzer, the end result could be twofold: A victory for the capital gains tax, and a ruling that eventually paves the way for an income tax in Washington state.

Even so, Mercier plans to lend his support to a legal challenge that he says will take shape “in the coming weeks,” vowing “with 100% certainty” that a lawsuit will eventually be filed in state court.

Listen to the Dori Monson Show weekday afternoons from noon – 3 p.m. on KIRO Radio, 97.3 FM. Subscribe to the podcast here.

Dori Monson on KIRO Newsradio 97.3 FM
  • listen to dori monsonTune in to KIRO Newsradio weekdays at 12 noon for The Dori Monson Show.

Dori Monson Show

Dori Monson

(Unsplash)...
Dori Monson Show

Dori: Former prison cellmate believes triple murderer is `not evil,’ should be freed

The 42-year-old case is back in the news after the Washington state Indeterminate Sentencing Review Board approved a summer release for Pauley.
1 day ago
(Unsplash)...
Dori Monson Show

Dori: Triple killer to be released unless Gov. Inslee overrules parole board

After 42 years behind bars, convicted killer Timothy Pauley, 63, has been approved for release by the Washington Indeterminate Sentencing Review Board.
2 days ago
Marysville School District...
Dori Monson Show

Dori: Parent permission for Marysville school clubs becomes `hot button’ over LGTBQ issue

The intent to the proposed policy change, Atchley said, is to assure that parents “have the ability to know where their children are at all times.”
6 days ago
OlyToys, Don Wolph's toy refurbishing business in Olympia....
Dori Monson Show

Dori: Olympia Toy-Restorer ordered by County to kick disabled friend off his property

Wolph told Dori’s listeners, Thurston County officials have told him he and his wife of 47 years must evict their friend because “she cannot live on my property for more than 30 days.”
7 days ago
Sound Transit employee records video of homeless individuals on light rail. (Jason Rantz/KTTH Radio...
Dori Monson Show

Dori: The Sound Transit rolling drug den

Onboard: a series of apparently homeless drug addicts, riding the train while smoking various drugs or passed out across the seats.
9 days ago
A ferry and a tanker pass through the Puget Sound near Seattle's iconic Pike Place Market on March ...
Dori Monson Show

Dori: Internal ferry system memos show PR image more important than service

The Washington State Ferry System preemptively slashed sailings rather than face ongoing negative publicity for possible service disruptions.
10 days ago

Sponsored Articles

...

Anacortes – A Must Visit Summertime Destination

While Anacortes is certainly on the way to the San Juan Islands (SJI), it is not just a destination to get to the ferry… Anacortes is a destination in and of itself!
...

Ready for your 2022 Alaskan Adventure with Celebrity Cruises?

Celebrity Cruises SPONSORED — A round-trip Alaska cruise from Seattle is an amazing treat for you and a loved one. Not only are you able to see and explore some of the most incredible and visually appealing natural sights on the planet, but you’re also able to relax and re-energize while aboard a luxury cruise […]
...

Compassion International Is Determined to ‘Fill’ a Unique Type of Football ‘Stadium’

Compassion International SPONSORED — During this fall’s football season—and as the pandemic continues to impact the entire globe—one organization has been urging caring individuals to help it “fill” a unique type of “stadium” in order to make a lasting difference in the lives of many. Compassion International’s distinctive Fill the Stadium (FtS, fillthestadium.com) initiative provides […]
...

What are the Strongest, Greenest, Best Windows?

Lake Washington Windows & Doors SPONSORED — Fiberglass windows are an excellent choice for window replacement due to their fundamental strength and durability. There is no other type of window that lasts as long as fiberglass; so why go with anything else? Fiberglass windows are 8x stronger than vinyl, lower maintenance than wood, more thermally […]
...

COVID Vaccine is a Game-Changer for Keeping our Kids Healthy

Snohomish Health District SPONSORED — Cheers to the parents and guardians who keep their kids safe and healthy. The dad who cooks a meal with something green in it, even though he’s tired and drive-thru burgers were tempting. The mom who calms down the little one who loudly and resolutely does NOT want to brush […]
...
Experience Anacortes

Coastal Christmas Celebration Week in Anacortes

With minimal travel time required and every activity under the sun, Anacortes is the perfect vacation spot for all ages.
Court battle over newly-passed capital gains tax could rewrite Washington’s tax code