Douglas County judge allows lawsuit against capital gains tax to move forward

A Douglas County Superior Court Judge has denied a motion asking that he throw out a lawsuit filed against the state’s recently passed capital gains tax.

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

Washington Attorney General Bob Ferguson had initially filed the motion in mid-June, challenging the legitimacy of a pair of lawsuits against the tax on a few fronts. First and foremost, he asserted that the lawsuits represent a matter of political disagreement, rather than a standard legal challenge. Given that, Ferguson argued that plaintiffs would suffer “no legal harm from the tax they challenge, and they ask this Court to issue a purely advisory political opinion.”

In rejecting that claim, Judge Brian Huber cited a court ruling in a previous lawsuit against a graduated income tax in Seattle, where an appeals court stated that “it is well settled that Washington courts have the power to hear constitutional challenges to tax laws.”

Ferguson’s second assertion was the because the tax doesn’t take effect until 2022 — and wouldn’t actually be due until the following year — there’s no way for plaintiffs to know whether they would be directly affected in any way. Judge Huber again disagreed, ruling that the state had “not presented sufficient legal authority” regarding the extent to which a party needs to be directly affected by a tax to challenge its constitutionality in court.

Ferguson also asked that the two lawsuits — which were combined into a single case by Huber in July — be moved to Thurston County Superior Court in the event that they weren’t dismissed, a request that was summarily rejected as well.

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“While it is true that the State has presented ample reasons why this court may choose to transfer venue to Thurston County, the state has not presented any persuasive legal authority that this court must or even should do so — particularly over the objection of the plaintiffs,” Judge Huber concluded in his ruling.

The tax was approved by the state Legislature in April, levying 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.

The lawsuits ask 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 graduated income tax has been illegal in Washington since a landmark 1936 case, in which the state Supreme Court ruled that 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 approved by voters at the time.

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