McKenna: ‘Courts are not supposed to be policymaking’ in capital gains tax

The capital gains tax passed in 2021 was ruled constitutional by the Washington state Supreme Court last Friday, despite heavy opposition to the ruling that the tax was an excise tax.

The legislation imposes a 7% tax on the sale of stocks, bonds, and other high-end assets in excess of $250,000 for both individuals and couples. It was projected to bring in $415 million in 2023, the first year the state would see money from the tax.

Capital gains tax ruled constitutional by WA Supreme Court

Supporters of the tax argue that it should be defined as an excise tax — as opposed to an income tax — the crux of the legal challenge, largely contingent on the argument that capital assets should be considered income. Opponents, and even the judges themselves, said Washington is the only state that categorizes a capital gains tax as an excise tax, not an income tax.

Former Washington Attorney General Rob McKenna filed one of two legal challenges against the tax on behalf of state residents, including manufacturing business owners, investors, and the Washington state Farm Bureau.

McKenna went on Seattle Morning News and talked to host Dave Ross about the legal challenges he tried to file against the tax before it was eventually ruled constitutional. He said that the court did not fully analyze the legality of the tax and, despite hearing the arguments and reading the briefs, was just “really determined to get to this result.”

The problem with this, though, McKenna said, is that it now opens the door for the legislature to change the law to affect more and more citizens.

He said that because the original text of the legislation set the tax not on capital gains over $250,000 but instead on capital gains above $25,000. The amount was raised because “one Democratic senator held out and said, I’m not going to give you the last vote … unless you raise it to a quarter of a million dollars.”

Lawyer: WA Supreme Court has ‘convoluted opinion’ over capital gains tax

“The legislature is going to turn around and lower the $250,000 threshold as soon as they can … there have been proposals in the last session in this session to slash that that threshold down to $25,000, or even $15,000, while also raising the percentage the tax rate from 7% to 8.5% to 9% or more,” McKenna said. “So, you know, the fact that it’s a quarter of a million now is just because that’s what it took to get the bill passed. The Legislature can change it anytime they can find a majority of votes to do that.”

So what’s stopping them from lowering the threshold at which the capital gains tax kicks in?

“They can change that whenever they want, they can expand the reach of the statute, the history of income taxes is that they start out only applying to the wealthiest people,” McKenna said. “And then over time, sometimes very quickly, they’re expanded to reach as many people as possible.”

McKenna said that he supports an initiative campaign to start to dismantle the tax as soon as possible, arguing that the courts have now taken a step too far in this ruling.

“Voters of the state have voted no less than 10 times against a progressive income tax in the state at some point, we ought to respect the voter’s wishes and not try to circumvent them by going through the court system,” McKenna said. “The courts are not supposed to be policymaking bodies, they are supposed to enforce the law and interpreted it as they find it.”

Listen to Seattle’s Morning News with Dave Ross and Colleen O’Brien weekday mornings from 5 – 9 a.m. on KIRO Newsradio, 97.3 FM. Subscribe to the podcast here.