Washington State Capital Gains Income Tax Ruled Unconstitutional

“ESSB 5096 is properly characterized as an income tax pursuant to Culliton, Jensen, Power and other applicable Washington caselaw, rather than as an excise tax as argued by the State,” Huber wrote in his ruling.

Those are references to state Supreme Court decisions, including the 1933 Culliton v. Chase case in which the justices invalidated a voter-approved progressive income tax meant to pay for education.

Huber also referenced the 1936 Jensen v. Henneford case in which the justices ruled that a state tax “on the privilege of receiving income” violated state uniformity requirements, as well as the court’s 1951 ruling in Power, Inc. v. Huntley that stated, “The character of a tax is determined by its incidents, not by its name.”

Huber went on to say, “As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on properly pursuant to that same caselaw. 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. It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”

Last year, the Democratically-controlled state legislature passed – and Gov. Jay Inslee signed into law – a capital-gains tax aimed at the state’s wealthiest residents.

The measure adds a 7% tax on capital gains above $250,000 a year, such as profits from stocks or business sales. Exceptions include the sale of real estate, livestock, and small family-owned businesses.

In April 2021, the Freedom Foundation, an Olympia-based think tank, filed a lawsuit against the new tax alleging it violates the state constitution, as well as the Commerce Clause of the U.S. Constitution by taxing the sale of capital gains held out-of-state by Washington state residents.

In May 2021, former state Attorney General Rob McKenna filed a second lawsuit on behalf of a coalition of farmers, business owners, investors, and the Lacey-based Washington Farm Bureau, claiming the law is unconstitutional because it’s really a graduated income tax and not an excise tax.

The cases were subsequently consolidated in Douglas County Superior Court.

It’s expected Tuesday’s decision will be appealed, with the state Supreme Court having the final say on the matter.

Originally published by The Center Square. Republished with permission.