Income or excise? Figuring out how state Supreme Court might rule on challenge to capital gains tax

Apr 8, 2022, 11:34 AM | Updated: Apr 11, 2022, 8:57 am

capital gains tax...

The Internal Revenue Service headquarters building. (Getty Images)

(Getty Images)

Is Washington’s capital gains tax an excise or income tax? That’s the question that could soon be presented to the state Supreme Court, and which two University of Washington experts debated over on Thursday night.

New ballot initiative takes aim at Washington capital gains tax

The state’s capital gains tax was approved by state lawmakers in 2021, imposing 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.

In early March, a Douglas County Superior Court ruled the tax unconstitutional, siding with plaintiffs in supporting their definition of capital gains as income. State Attorney General Bob Ferguson then filed a request for direct review with the state Supreme Court, which has yet to render a decision as to whether it will hear the case right away, or kick it down to an appeals court first.

If or when it does end up in front of the state’s highest court, University of Washington constitutional law professor Hugh Spitzer believes that it is “more than likely” justices will side with the state in defining the levy as an excise tax.

Under existing court precedent, the state defines income as property, making it a violation of the state’s constitution to tax either at a graduated rate. Speaking during a debate on TVW’s “Inside Olympia,” Spitzer pointed to how Washington’s definition of an excise tax gets around that mandate.

“Under Washington law, an excise tax is a tax on an activity, on an event; property tax is a tax on standing property,” he described.

Essentially, an annual tax on property owned by someone in Washington falls under the “income tax” umbrella. But when that property is sold, the money from that sale is levied as an excise tax based on a separate decades-old state Supreme Court ruling.

“That’s how the capital gains tax was structured from a state perspective,” Spitzer added. “It’s a tax on the activity of selling certain kinds of capital assets measured by the amount of the gain — it’s a very technical issue, but I think that the state Supreme Court is going to understand this issue, and will make this ruling under Washington law.”

Taking issue with that position was UW tax law professor Scott Schumacher, who believes that the capital gains tax is unconstitutional.

Court battle could rewrite Washington’s tax code

“The way it’s measured how it’s reported, the various deductions and exemptions, make it seem more like an income tax than an excise tax,” he posited. “I think the indicia of the tax make it more like an income tax, and as such, there are 70, 80 years worth of Washington Supreme Court decisions on this saying that an income tax or tax on property is unconstitutional.”

As Schumacher further points out, money made from capital gains is also reported on federal income tax returns.

“Professor Spitzer is correct that this is a state tax question, but just the way it’s calculated, the way it’s reported, you have to file your federal income tax return to show that the capital gains tax that you’re reporting to the federal government is equivalent to or equal to the capital gains you’re reporting to the state of Washington,” he continued. “To me, it just has the indicia of an income tax. It tracks the federal definition and provides deductions and exemptions for the charitable deduction that goes against that.”

That’s the primary argument made by plaintiffs in the lawsuit seeking to overturn the tax, who point to a series of similarities between how income taxes are calculated and how the capital gains tax was designed.

You can watch the full debate between Spitzer and Schumacher here: 

Local News

White Center shooting...

Colleen West

3 hurt after shooter opens fire at White Center bowling alley

KING COUNTY, Wash. — A shooter is on the loose after opening fire on three people at a White Center bowling alley and casino Saturday night.

23 hours ago

Eugene and Linda Lamie, of Homerville, Ga., sit by the grave of their son U.S. Army Sgt. Gene Lamie...

Associated Press

Biden on Memorial Day lauds generations of fallen US troops who ‘dared all and gave all’

President Joe Biden lauded the sacrifice of generations of U.S. troops who died fighting for their country as he marked Memorial Day with the traditional wreath-laying ceremony at Arlington National Cemetery.

23 hours ago

echo glen juvenile...

KTTH staff

7 juvenile Echo Glen inmates escape, 4 still on the loose

Seven juveniles escaped the Echo Glen Juvenile detention center early Sunday, according to the King County Sheriff's Office.

2 days ago

(Photo from KIRO 7)...

KIRO 7 News Staff

Crew shortages force WA State Ferries to cancel nearly a dozen trips

Crew shortages forced Washington State Ferries to cancel nearly a dozen trips on one of the busiest travel days KIRO 7 has seen so far this year.

2 days ago

OpenAI's CEO Sam Altman, the founder of ChatGPT and creator of OpenAI gestures while speaking at Un...

Associated Press

ChatGPT maker downplays fears they could leave Europe over AI rules

OpenAI CEO Sam Altman on Friday downplayed worries that the ChatGPT maker could exit the European Union

2 days ago

Woman stabbed Central District...

Julia Dallas, KIRO 7 News

Woman escapes through second-story window after man allegedly stabs her in Central District

A woman escaped through a second-story window after a man allegedly stabbed her on Saturday in the Central District.

3 days ago

Sponsored Articles

Internet Washington...

Major Internet Upgrade and Expansion Planned This Year in Washington State

Comcast is investing $280 million this year to offer multi-gigabit Internet speeds to more than four million locations.

Compassion International...

Brock Huard and Friends Rally Around The Fight for First Campaign

Professional athletes are teaming up to prevent infant mortality and empower women at risk in communities facing severe poverty.

Emergency Preparedness...

Prepare for the next disaster at the Emergency Preparedness Conference

Being prepared before the next emergency arrives is key to preserving businesses and organizations of many kinds.

SHIBA volunteer...

Volunteer to help people understand their Medicare options!

If you’re retired or getting ready to retire and looking for new ways to stay active, becoming a SHIBA volunteer could be for you!

safety from crime...

As crime increases, our safety measures must too

It's easy to be accused of fearmongering regarding crime, but Seattle residents might have good reason to be concerned for their safety.

Comcast Ready for Business Fund...

Ilona Lohrey | President and CEO, GSBA

GSBA is closing the disparity gap with Ready for Business Fund

GSBA, Comcast, and other partners are working to address disparities in access to financial resources with the Ready for Business fund.

Income or excise? Figuring out how state Supreme Court might rule on challenge to capital gains tax