Controversial capital gains tax struck down by Douglas County Superior Court judge
A controversial capital gains tax passed by the Washington State Legislature in 2021 was ruled unconstitutional by a Douglas County Superior Court Judge on Tuesday.
In Judge Brian C. Huber’s ruling, he rejected the state’s argument that the capital gains tax is an excise tax. Instead, he ruled, the tax is “properly characterized as an income tax” pursuant to applicable Washington case law.
“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.”
“It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold, “ the ruling continued. “It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”
The capital gains tax, which was billed as legislation to tax only the most wealthy Washingtonians, would impose a 7% tax on profits over $250,000 from the sale of assets such as stocks, bonds, and mutual funds.
The tax does not apply to sales of real estate, livestock or timber, among other things.
Arguments by the state and the plaintiffs were heard on Feb. 4.
In a statement released by Washington Attorney General Bob Ferguson on Tuesday, Ferguson said his office disagreed with the ruling and intends on appealing the decision. He noted that all parties involved in the case are aware that the case will “ultimately be decided by the state Supreme Court.”
“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.”
Rob McKenna, former Washington State Attorney General and attorney for the plaintiffs in the case against the capital gains tax, said he appreciated the judge’s “careful consideration of those precedents in reaching a similar result in this case.”
“This is not the first time a Washington court has rejected an attempt by the legislature to enact an unconstitutional income tax by labeling it an ‘excise tax’,” McKenna said.
The Senate Bill has faced intense criticism since its introduction and passage. Washington State Republicans at the time warned that the case would eventually wind up in the courts because they believed the tax was an income tax, which is unconstitutional in Washington.
Democrats who introduced and passed the legislation last year argued that the capital gains tax was an excise tax, and that revenue from the tax would help fix the upside-down tax code in the state.
The first $500 million in revenue from the tax would go into the state Education Legacy Trust Account. The remainder of that would go into the Common School Construction Account.
Multiple amicus briefs have been filed in support of the capital gains tax.
Adrienne Stuart, a mom of children with developmental disabilities, and a potential capital gains taxpayer, signed on to support an amicus brief filed in support of the state. She said she signed on to support the state because she believes the tax system needs to be addressed and wealthy people “need to pay their fair share.”
She also said she believes schools need the funding that would be provided by the tax, and said she felt disappointed by the ruling today, despite potentially being affected by the tax in the future.
“I think it’s time for us as a state to start having the conversations about the things that aren’t properly funded and the people in particular who aren’t paying their fair share towards the essential services that we all need and want,” Stuart said.
In his ruling, Huber noted that “This Court is not permitted to consider such policy considerations when ruling on the constitutionality of ESSB 5096,” referring to the amicus briefs filed on behalf of the state.
“It is not the function of [the courts] ... to consider the propriety of the tax, or to seek for the motives or to criticize the public policy which may have prompted adoption of the legislation,” he wrote.
This story was originally published March 2, 2022 at 8:43 AM.
