A final ruling on the legality of Washington state’s new capital gains tax can’t come soon enough.
That’s because the state Supreme Court is allowing the state to collect its money until a final ruling is made on the case.
So until then, taxpayers caught in this net are expected to pay up with the assurance their money will be refunded with interest if the challenge to the capital gains tax prevails.
Even though this is expected to affect less than 1% of WA taxpayers, it’s still a mess. People shouldn’t be kept in limbo.
As it happens, oral arguments in the case will be heard by the state Supreme Court on Thursday, Jan. 26.
But who knows how long it will take before a decision is made? It could be months.
It was exasperating the way this tax measure was pushed through the Legislature two years ago, and the controversy surrounding it still continues.
While we believe changes are needed to make the state’s tax system more fair, using the courts to try and slip in an income tax is wrong — but that’s what is happening.
The sooner the Supreme Court rules on this issue, the better.
Here’s the history:
The Washington state constitution prohibits a graduated income tax, and efforts to change that have been shot down by voters 10 times since the 1930s.
But many citizens see our state’s reliance on sales taxes as shameful because it puts a disproportionate burden on those with lower incomes.
And they are right. It does.
So in 2021, Democrats proposed Senate Bill 5096 which would impose a 7% tax on the capital gains received from the sale of stocks, bonds and other high-end assets over $250,000 for individuals and couples.
Currently, it exempts retirement accounts and real estate, but there is no guarantee that those exemptions will continue in the future if the capital gains tax is allowed to stand. There’s also no guarantee that the 7% tax also won’t be increased at some point.
These are major concerns.
Democrats insist that a capital gains tax is an excise tax and therefore should not be considered a tax on earned income, which would be considered unconstitutional.
However, the IRS says a capital gains tax is an income tax, and past rulings by our state Supreme Court have affirmed that position.
So the goal by Democrats is to hope a majority of Supreme Court justices sees things their way this time so they can do an end-run around the constitution. The strategy has been long in coming.
Jason Mercier of the Washington Policy Center has been following this issue for years, and through a public records request received email exchanges from lawmakers indicating their motives.
This is an old email he discovered, but it’s worth bringing up again because it demonstrates ulterior motives.
In 2018, Sen. Jaime Pedersen, D-Seattle, wrote: “This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.”
This is at the crux of the current lawsuit.
To make matters more upsetting, the capital gains tax approved in 2021 was deemed an “emergency” by legislators so voters would not be able to quickly repeal it through the referendum process.
That’s not how an emergency clause is supposed to work. It is supposed to be used in a crisis — not as a way to keep citizens at bay while potentially unpopular laws are rammed through.
While we understand the desire to change the state’s regressive tax system and make it more equitable, trying to bypass the constitution is not the right approach.
Legislators who want to impose an income tax should make their case to voters. Or, they could take more seriously the findings of a bipartisan Tax Structure Work Group who spent hours trying to come up with ways to adjust our current tax system and recently released its suggestions.
Unsurprisingly, imposing a capital gains tax is not among the recommendations.