WA Supreme Court hears first oral arguments in capital gains tax case

After nearly two years of embattlement over the capital gains tax, the Washington state Supreme Court heard the first arguments from lawyers in court Thursday.

Lawyers on both sides of the case, Chris Quinn et al. v. State of Washington et al., were each given time at the beginning of the hearing to present their arguments to Supreme Court justices.

The question at hand for justices to decide: Is the capital gains tax an unconstitutional non-uniform property tax? Does it otherwise violate the constitution?

Noah Purcell, counsel for the State of Washington gave the first opening arguments in favor of the tax. He argued that the capital gains tax is an excise tax and not an income tax.

“This tax is very clearly an excise tax under this court’s case law,” Purcell noted. “The court has been very clear that property taxes are taxes that apply merely because a person owns property. The other side agrees that that is the relevant test. Under that test, this tax does not work in that way — a person can own limitless stocks or bonds, can hold them for years, they can increase drastically in value and the person owes no tax that whole time. It is only when they sell the assets, when they sell the stocks or bonds, that they owe the tax. And that is why this is so clearly an excise tax.”

But Callie Anne Castillo, an attorney for petitioners in the case, contends the tax is not an excise tax. She said the capital gains tax is unconstitutional for three reasons. The court only needs one reason from that list, she said, to invalidate the tax.

First, the tax is a non-uniform property tax on individual income and violates the state privileges and immunities clause, Castillo argued. It also burdens interstate commerce in violation of the U.S. Commerce Clause.

“The capital gains tax is not a valid excise tax as the state argues,” Castillo continued. “The label of excise does not match how the tax actually operates or functions. This court has said that an excise tax is imposed on the taxpayer for engaging in a voluntary act that triggers the taxable event, and is not measured by the taxable activity. But here, the capital gains tax does not meet any one of those elements.”

Castillo added that taxpayers don’t need to be a party to a transaction to be subject to the tax because the bill states that the tax is imposed when individuals recognize capital gains on their federal income tax forms. That, she said, is the subject of the tax — income, not the transaction.

Before the court adjourned, Purcell asked Justices to uphold the tax. Because the tax is due on April 18 and the Legislature adjourns on April 23, Purcell asked the Justices to expedite the ruling. He said state legislators and the governor would have more certainty in budget writing. Taxpayers also would benefit from the certainty, he added.

The capital gains tax, which Democrats said is aimed at taxing only the richest Washingtonians, passed the legislature in 2021. The law imposed a 7% tax on profits over $250,000 from the sale of assets including stocks, bonds, and mutual funds. This means that if someone made profits of $300,000 from selling stocks, they would pay 7% in taxes on $50,000 of those profits.

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.

Farms, real estate, retirement, and many other accounts are exempt from the capital gains tax. Additionally, less than 8,200 people in Washington state would have to pay the capital gains tax, according to the Washington State Budget and Policy Center.

The tax 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 is an income tax, which is unconstitutional in Washington.

In March 2022, the capital gains tax was ruled unconstitutional by a Douglas County Superior Court Judge who said the tax was “properly characterized as an income tax” pursuant to applicable Washington case law.

The capital gains tax went into effect in January 2022, but payments on those taxes won’t be due until April of this year.