Capital gains tax gets the go ahead as state Supreme Court considers case

The Department of Revenue (DOR) will be able to collect Washington state’s new capital gains tax ahead of the Washington state Supreme Court’s final ruling on the constitutionality of the income tax.

Washington state Attorney General Bob Ferguson recently requested that the DOR be allowed to collect the tax ahead of the official ruling. Ferguson said that “our state’s elected leaders adopted a capital gains excise tax to fund education, the State’s paramount duty, and to help rebalance our tax code, the nation’s most regressive,” in his motion filed with the court.

Washington Supreme Court to decide capital gains tax case

This comes after a lower court judge ruled that the capital gains tax was “unconstitutional” back in March because it was not an outright tax on property, but rather appeared to be closer to an income tax, which is unconstitutional in Washington state.

“It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold,” Douglas County Superior Court Judge Brian Huber’s ruling reads.

The law creating the capital gains tax, SB 5096, was signed last year by Gov. Jay Inslee and went into effect in January 2022, before it was stopped. The legislation created a 7% excise tax on the sale or exchange of capital assets above $250,000. It was projected to bring in $415 million in 2023, the first year the state would see money from the tax.

Defining it as an excise tax — as opposed to an income tax — was the crux of the legal challenge, largely contingent on the argument that capital assets should be considered income.

With the state Supreme Court’s ruling, the new tax can be collected while they are still reviewing the case.

“The Court voted unanimously in favor of the following result: Now, therefore, it is hereby ORDERED: That the motion for a stay of the lower court’s order pending review is granted. The lower court order is stayed pending this Court’s final decision in this matter. DATED at Olympia, Washington this 30th day of November, 2022,” the ruling read.

The legal challenge stems from two lawsuits that were later consolidated. The first was filed last April by The Freedom Foundation, an Olympia-based conservative think tank. A month later, former Washington Attorney General Rob McKenna filed the second on behalf of state residents, including manufacturing business owners, investors, and the Washington State Farm Bureau.

One of the opponents to the tax, the Citizen Action Defense Fund (CADF), released a statement expressing their disappointment with the court’s decision to allow the tax to be collected while waiting for a ruling.

“While we are disappointed in the Court’s ruling today, the fact that the State was forced to follow proper procedure demonstrates that no one – even a state agency – is above the law.  CADF was clearly right in insisting that the Department needed to get a motion to stay the trial court ruling and couldn’t just ignore it,” CADF said.

Supporters of the tax say that Washington — one of a handful of states with no income tax — leans too heavily on its sales tax, disproportionately affecting those with less income.

The state Supreme Court will hear oral arguments on the capital gains income tax on January 26, 2023.