By BRETT DAVIS
THE CENTER SQUARE STAFF REPORTER
(The Center Square) — Two amicus briefs have been filed opposing Washington state’s new capital gains income tax that is set to go into effect next year.
At issue in the case is whether the new law – which levies a 7% tax on capital gains above $250,000 for individuals and joint filers from the sale of assets such as stocks and bonds – imposes an excise tax or an income tax. And if the latter, whether income is property as defined by the state constitution and subject to its uniformity clause.
On Monday, the first “friend of the court” brief was filed by “Tax Economists and Policy Analysts” that includes Seattle-based think tank the Washington Policy Center and the National Taxpayers Union Foundation. It was followed later in the day by a second amicus brief filed by the Building Industry Association of Washington (BIAW) and the Washington Cattlemen’s Association (WCA).
“This tax is bad law and bad policy. Period,” said Jackson Maynard, general counsel for BIAW, in an email to The Center Square. “We are proud to stand with other associations and point out all the terrible ways that this illegal and unconstitutional tax is also bad for businesses in our state. As we pointed out in our brief, ‘no rational business owner wants to operate in an environment of legal uncertainty, under a tyrannical legislature that ignores constitutional limits on its power.’”
Both amicus briefs focus heavily on the wordplay being used by the state in defending the new tax resulting from Engrossed Substitute Senate Bill 5096, passed by the state legislature and signed by Gov. Jay Inslee earlier this year.
“ESSB 5096 purports to impose an excise tax on capital gains rather than an income tax,” the BIAW/WCA brief states. “This represents a radical departure from how every other jurisdiction in our nation treats capital gains. The federal government, which of course taxes capital gains nationwide, treats them as income. The forty-one states that tax capital gains also treat them as income. The only states that do not tax capital gains as income are those that levy no income taxes at all – Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming – and the two states, New Hampshire and Tennessee, that tax only dividends and interest income earned by individual taxpayers. Thus, every jurisdiction in our nation that taxes capital gains treats them as income, and duly recognizes its capital gains tax as an income tax. The solitary exception is Washington, thanks to ESSB 5096.”
The brief goes on to note, “With the vote forty-nine to one, logic compels the conclusion that the emperor has no clothes and the capital gains tax imposed by ESSB 5096 is actually an income tax, not an excise tax, self-serving legislative nomenclature notwithstanding.”
The brief also took exception to the linguistic creativity used by the state to justify the law.
“Roses are roses, ducks are ducks, and taxes on capital gains are taxes on income,” according to the brief. “Excise taxes or transaction taxes do not have exemption levels, nor are they imposed on annual totals, nor do they track the filing deadlines and requirements of the federal income tax. State income taxes do all those things. Washington taxpayers will fill out a return due the same day as the federal income tax, and the base of the tax will be derived from capital gains taxed under the federal income tax and state income taxes. The IRS, every other state, and every tax expert agree that capital gains are income.”
In April, 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, 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. On Sept. 10, Judge Brian Huber issued a ruling denying the state’s motion to dismiss.
The case is expected to be decided later this year or early 2022. It’s widely anticipated the decision will be appealed and that the validity of the tax will ultimately be decided by the Washington State Supreme Court.
Brett Davis covers the Washington state government for The Center Square.