State capital gains income tax upheld

Ever since legislative Democrats passed a law (Senate Bill 5096) two years ago creating a capital gains state income tax in Washington, observers on both sides of the political aisle have been waiting for the controversial law to make its way to the state Supreme Court, where the court’s nine justices would decide whether the law was constitutional.

Following a hearing in late January, the Supreme Court on March 24 issued its ruling, one that has opponents of this tax shaking their heads in disbelief. The court upheld the constitutionality of Washington’s capital gains tax.

The court’s vote on the case was 7-2. Justice Debra Stephens wrote the majority opinion, which was signed by Chief Justice Steven Gonzales as well as justices Barbara Madsen, Raquel Montoya-Lewis, Susan Owens, Helen Whitener and Mary Yu.

Justices Sheryl Gordon McCloud and Charles Johnson were the two dissenting votes. In the conclusion of her dissenting opinion, Justice Gordon McCloud wrote, “The structure of the capital gains tax shows that it is a tax on income resulting from certain transactions – not a tax on a transaction per se. Therefore, the tax in an income tax, not an excise tax. Under our constitution and case law, an income tax is a property tax. As enacted, this income tax or “capital gains tax” violates the one percent levy limitation of article VII, section 2.”

Ever since the state Supreme Court issued a decision in 1933 overturning a progressive income tax, several attempts to implement a state income tax have been rejected by either the Supreme Court or Washington voters. Unfortunately, the current Supreme Court chose to ignore decades of precedent and forge ahead in a totally different legal direction.

At issue was whether the capital gains tax is a state income tax, which is unconstitutional in Washington, or if it is an excise tax. The majority of the court said it is an excise tax.

The capital gains tax applies a 7% tax to profits over $250,000. The tax applies to the sale of financial assets like stocks and bonds and has been expected to collect about $500 million annually.

What is really shocking about this ruling for me is that 49 other states and the IRS all recognize that capital gains taxes are income taxes, and yet the Supreme Court chose to go the other way. As the Washington Policy Center wrote about the ruling, “Today’s decision will make Washington state the only state to define capital gains taxes as excise taxes and opens the door to introduction of other income taxes as well.”

Last year, a Douglas County judge ruled that the capital gains tax was unconstitutional because it taxed capital gains above $250,000 at 7% and gains below that amount not at all. That judge was right on the mark. It’s too bad most of the Supreme Court thinks otherwise.

Now that the Supreme Court has made its decision, don’t be surprised if legislative Democrats come back in future sessions and widen the parameters of this tax so it applies to more people by lowering the minimum amount needed be earned on capital gains to pay this tax, or by eliminating some or all of the current exemptions. In fact, there is a bill this session that would start collecting a capital gains tax on an individual’s first dollar earned that way. When Democrats passed the capital gains measure in 2021, they argued that only the rich would pay it. But as I’ve seen during my 30 years in Olympia, Democrats seldom hesitate to raise or expand taxes or create new taxes, especially when they argue that it is about generating necessary revenue to help pay for needed services and programs. Years ago, we were told the estate tax (or “death tax”) would save K-12 education in our state, and we know that this prediction failed to come true, and now the House is considering raising that tax.

The Supreme Court’s ruling on the capital gains tax is one of its most disappointing decisions that I can recall.

— Sen. Mark Schoesler, R-Ritzville, represents the 9th Legislative District. Email him at Mark. Schoesler@leg.wa.gov.