WA jumps appeals court, asks state Supreme Court to take on legal battle over capital gains

There was never any doubt a recent Douglas County Superior Court Judge’s ruling that shot down the state’s new capital gains tax would be appealed – the only question was whether that would follow a traditional path or circumvent the state appeals court and go straight to the state Supreme Court.

Late last week that question was answered when the state Attorney General’s Office filed a request for direct review with the state Supreme Court.

The capital gains tax passed the legislature in 2021’s ESSB 5096 and the first lawsuit was filed before Governor Inslee even signed it.

In his March 4th ruling, Douglas County Judge Brian C. Huber rejected state claims that this was an excise tax, writing that the tax was “properly characterized as an income tax” pursuant to applicable Washington case law.

Washington state’s capital gains tax unconstitutional, rules Douglas County Court

“As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on property pursuant to that same case law,” Huber wrote. “This Court concludes that ESSB 5096 violates the uniformity and limitation requirements of Article VII, sections 1 and 2 of the Washington State Constitution.”

Specifically, he pointed to the fact that ESSB 5096 imposes a 7% tax on capital gains over $250,000 but no tax on gains below that threshold as violation of the uniformity requirement, and said it violated the limitation requirement by imposing a 7% tax, higher than the 1% maximum tax rate on property of 1%.

State Attorney General Bob Ferguson said in a statement at the time that he disagreed with the judge’s ruling and that the state would appeal.

“There’s a great deal at stake in this case, including funding for early learning, child care programs, and school construction,” Ferguson said “Consequently, we will continue defending this law enacted by the peoples’ representatives in the Legislature.”

Ferguson noted all parties always expected the case to be decided by the state supreme court, but did not indicate whether he intended to pass over the traditional appeals court at the time.

The Freedom Foundation – the first to file a lawsuit against the tax — said in a statement this week it was not surprised Ferguson appealed straight to the state supreme court.

“The Freedom Foundation is not surprised Attorney General Ferguson appealed the judge’s decision directly to the state Supreme Court. Ferguson and the state are playing with our tax dollars to defend this illegal tax,” said Eric Stahlfeld, chief litigation counsel for the Freedom Foundation. “We were the first to file a lawsuit against this unconstitutional tax scheme, and we’ll continue to fight to defend Washington’s taxpayers.”

Many believe supporters of the capital gains tax have always intended to have the case go before the justices to create an opportunity for them to revisit a 1933 court ruling defining income as property that’s blocked efforts for a progressive income tax in Washington for 80 years.

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