The Washington State Supreme Court has ruled in favor of a capital gains tax, leaving local Republican legislators concerned the decision runs counter to how the tax is interpreted in other states.
On March 24, the court announced its 7-2 decision, which ruled the tax as constitutional. The legislation places a 7% tax on sale or exchange of “long-term capital assets” like stocks, bonds and business interests, according to the Washington State Department of Revenue. A number of exemptions are available, including a $250,000 standard deduction.
Revenue from the tax will fund the state’s education legacy trust account and common school construction account, according to the department.
In the majority opinion, Chief Justice Debra Stephens wrote that “(t)he capital gains tax is a valid excise tax under Washington law.”
Approved by the Washington State Legislature and signed by Gov. Jay Inslee in 2021, the bill enacting the tax was initially challenged in a lower court. In March 2022, a Douglas County Superior Court judge ruled against the tax, and the state supreme court heard arguments earlier this year.
Following the announcement, Inslee took to Twitter to herald the decision. He said the tax “helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents.”
The day the decision was announced, state Sen. Lynda Wilson, R-Vancouver, said it was “disappointing that a majority of the justices went along with the Democrats’ creative argument that this is something other than an income tax.”
The court ruled the tax did not fall under the definition of an income tax, which goes against what opponents, like Wilson, believe.
“No one else, including the Internal Revenue Service, sees the capital gains from the sale of certain assets as anything but income,” Wilson said in a statement. “Washington is a special place, but this isn’t the kind of outlier we ought to be.”
The ruling noted that with its lack of an income tax, “Washington’s tax system has earned the regrettable title of most regressive in the nation.” Wilson said Democrats hoped the court would rule in a way that could open up an income tax.
“I don’t see how this decision gets them there and that is a relief,” Wilson said. “But taxpayers clearly need to be on their guard — we should expect the Democrats to start adjusting the parameters of this tax so it applies to more and more people over time, which means more and more of their money going to government.”
State Rep. Ed Orcutt, R-Kalama, also provided a statement following the decision.
“I am concerned about the court’s ruling on this tax as it contradicts the precedent and interpretation of every state and the U.S. government that regard this as an income tax,” Orcutt said. “And, the ruling appears to disregard the actual language of the statutes outlining what is actually taxed.”
The capital gains tax also saw opposition from trade associations like the Building Industry Association of Washington. The association’s general counsel Jackson Maynard said the ruling “is at odds with the legal opinion of every other state in the country and the federal government,” mirroring Wilson and Orcutt’s statements.
“Washington state is the only place in the country where a capital gains tax is not considered an income tax,” Maynard said in a statement. “This is a radical departure. It creates an undesirable inconsistency that will cripple our state’s competitiveness and drive more businesses out of our state.”
