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Washington’s newly-passed capital gains tax faces first legal challenge

(Photo Illustration by Scott Olson/Getty Images)

Washington’s newly-passed capital gains tax is facing a lawsuit just three days after it was approved by state lawmakers in Olympia.

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

The bill — currently awaiting Gov. Inslee’s signature — levies a 7% tax on capital gains above $250,000 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.

That’s one of the primary arguments in a lawsuit filed Wednesday in Douglas County Superior Court by the Freedom Foundation, a Washington-based conservative think tank.

“How many times do we have to go down this road?” Freedom Foundation CEO Aaron Withe said in a written release. “Capital gains are clearly income. And when you tax them, it’s an income tax — no matter what you choose to call it.”

WA Rep: Capital gains tax ‘not necessarily’ first step toward income tax

The group’s filing asks the court to void the tax, declare the bill unconstitutional, prevent its implementation while the lawsuit plays out, and have the state pay the plaintiffs’ legal fees.

A separate group known as the Opportunity for All Coalition has also vowed to file a lawsuit of its own in the coming days, citing similar grounds to the Freedom Foundations’ own filing.

As for whether the arguments against the tax will hold up in court, others have claimed that the phrasing of the bill could lead to a different legal interpretation.

That includes University of Washington law professor Hugh Spitzer, who argued in a March editorial for the Seattle Times 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 state courts 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.”

Should the Freedom Foundation’s lawsuit get rebuffed, it would not only score a victory for the capital gains tax, but would also potentially pave the way for an income tax in Washington.

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