Washington State Supreme Court upholds capital gains tax

The tax will raise an estimated $500 million annually, according to the governor’s office.
FILE – Washington Gov. Jay Inslee speaks on Jan. 11, 2022, at the Capitol in Olympia, Wash. (AP Photo/Ted S. Warren, File)

In a victory for Gov. Jay Inslee (D) and Democratic legislative leaders, the Washington State Supreme Court on Friday ruled that a 2021 capital gains tax is an excise tax — not an income tax — and therefore allowed under the state constitution.

The ruling clears the way for Washington to collect a 7% tax on the sale of stocks and other long-term investments worth over $250,000 and to use the revenue to fund early childhood education.

“For 134 years, Washington state has been waiting for the day when a fairer tax system came about, one where working people were not carrying an inequitable share of the burden,” Inslee said in a statement. “Today is that day.”

The ruling shocked the tax’s opponents. “UNREAL,” Jason Mercier, director for the Center for Government Reform at the Washington Policy Center, a free market think tank, wrote in an email to Pluribus News. “Every other tax jurisdiction in the world says a capital gains tax is an income tax.”

Investors who’d be affected by the capital gains tax sued Washington State to block the law. They argued that the tax was an income tax, which Washington courts have held to be a type of property. Under the Washington state constitution, property tax rates must be limited to 1% and applied uniformly. Previous court rulings have barred the legislature from creating a graduated income tax.

The state Supreme Court’s 7-2 decision reversed a lower court ruling and held that the capital gains tax was an excise tax, as the state had argued.

“The capital gains tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves,” Justice Debra Stephens wrote for the majority.

She noted that because Washington does not tax incomes and relies on sales and property taxes, it has “a uniquely regressive tax system” that “perpetuates systemic racism.”

In a dissenting opinion, Justice Sheryl Gordon McCloud wrote that the capital gains are income, and a tax on those gains is therefore a property tax under state law.

“Deciding whether to retain our regressive tax structure or to replace it with a more equitable one is up to the legislature through legislation and the people through constitutional amendment,” she wrote.

The capital gains tax will raise an estimated $500 million annually, Inslee’s office said.

“Today’s decision provides much needed certainty for budget writers as the Legislature continues to craft our state’s next two-year operating budget,” Sen. Christine Rolfes (D), chair of the Senate Ways & Means Committee, said in a statement. “We are eager to expand support for working families, and today’s ruling locks in dedicated funding to increase access to affordable early learning and childcare.”

The ruling also could fuel some Democratic lawmakers’ efforts to raise taxes on the wealthiest Washingtonians. Sen. Noel Frame (D), who has proposed a wealth tax on multi-millionaires and billionaires, said in a statement that she is “encouraged by this ruling.”

“Our work on reforming our tax system so the wealthiest few pay what they owe must continue,” she said.

Austin Jenkins contributed to this report.