HomeBudget & Tax NewsIs Washington's State Capital Gains Tax Constitutional?

Is Washington’s State Capital Gains Tax Constitutional?

Is Washington’s state capital gains tax constitutional, or does it violate property protections? State Supreme Court to decide.

(The Center Square) – The Washington State Constitution has the broadest definition of “property” of any state in the nation.

So argued Jason Mercier, director of the Center for Government Reform at the free-market Washington Policy Center think tank, in a recent post and news release.

According to Article VII, Section 1 of the state Constitution, “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word ‘property’ as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.”

This definition of property was the result of a constitutional amendment passed by nearly 61% of voters in 1930 and could be a factor in the state Supreme Court’s upcoming direct review decision on the constitutionality of the state’s new capital gains income tax.

State Capital Gains Tax

Last year, the 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.

On March 1, Douglas County Superior Court Judge Brian Huber ruled that the tax on capital gains was “properly characterized as an income tax…rather than as an excise tax as argued by the State” and thus struck it down, as Washington’s constitution’s uniformity clause does not allow income to be taxed at different rates.

State Attorney General Bob Ferguson then asked the state Supreme Court to take up the case on direct appeal, with the high court agreeing to do so.

Mercier was critical of what he sees as an attempted end run around the fact the state defines income as property.

“The proper way to impose a graduated income tax in Washington is with a constitutional amendment,” he said. “Claiming an income tax is instead an ‘excise tax’ to set up litigation in hopes the state supreme court will now say that we don’t own our income is disingenuous at best and highly contemptible of voters and the norms of governing.”

Mercier buttressed his claim by noting that for nearly a century, the state Supreme Court has consistently ruled that income is property.

He cited the one-page 1960 decision, Apartment Operators Association of Seattle, Inc. v. Schumacher, in which the high court advised “the constitution may be amended by vote of the people” in order to impose a graduated income tax in Washington.

Voters in Washington state have rejected six constitutional amendments allowing a progressive income tax, Mercier said, as well as four income tax initiatives.

Excise Tax?

University of Washington law professor Hugh Spitzer has a different take, although he agrees with Mercier on one thing.

“Yes, it’s a very broad definition,” he said of the state’s take on “property.”

Spitzer went on to note, “But there are still a number of cases in which the state Supreme Court held that taxes were NOT property taxes. Those include the case upholding the old motor vehicle excise tax, and another upholding the real estate excise tax.”

In the 1937 case State ex rel. Hansen v. Salter, Washington’s highest court held that a motor vehicle tax, measured annually upon the value of vehicle at registration, is a valid excise tax.

In its 1952 ruling in Mahler v. Tremper, the state Supreme Court held that a county tax on the sale of real estate is an excise tax and not a property tax because it is a tax on the transaction rather than merely ownership. Because the real estate tax is an excise tax and not an income tax, it is allowed to be graduated.

“In each instance the court held that the tax was on a transaction (selling real restate) or an action (having a car with the right to drive on public roads),” Spitzer explained.

He predicted the state Supreme Court would do the same regarding the capital gains income tax.

“I think the court will uphold this tax on the act of selling securities and realizing a one-time capital gain,” he said. “It’s a tax on the sale, not on the property.”

Originally published by The Center Square. Republished with permission.

For more Budget & Tax News.

Brett Davis
Brett Davis
Brett Davis reports on Washington state government for The Center Square.


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