Judge overturns Washington state’s new capital gains tax

• UPDATED [12:29 AM MARCH 2, 2022]: Added the Republican response to the capital gain tax ruling

DOUGLAS COUNTY, March 1, 2022 – Today, Douglas County Superior Court Judge Brian Huber overturned a new capital gains tax that was signed into law last year by Governor Jay Inslee. Huber ruled that it is an unconstitutional tax on income.

“The State characterizes the new tax statute as a “tax that applies on the sale or transfer of property” and argues that such taxes are excise taxes” he wrote. “But as noted above, the new tax is not levied upon ’the sale or transfer” of capital assets. Instead, the new tax statute levies a tax on receipt, and thus ownership, of capital gains.”

Attorney General Bob Ferguson released the following statement after a Douglas County Superior Court judge ruled against the state in a challenge to a tax on capital gains passed by the Legislature in 2021:

“There’s a great deal at stake in this case, including funding for early learning, child care programs, and school construction. Consequently, we will continue defending this law enacted by the peoples’ representatives in the Legislature. All the parties recognize this case will ultimately be decided by the State Supreme Court. We respectfully disagree with this ruling, and we will appeal.”

Senate Bill 5096, which Gov. Jay Inslee signed into law in May of last year, creates a 7 percent excise tax on capital gains above $250,000 beginning this year. The first collections under the law would begin in 2023. Less than one in 1,000 Washingtonians are expected to owe the tax each year, and only the wealthiest few.

The law applies to the sale of assets like stocks and bonds where a person receives capital gains exceeding $250,000 during the year. For example, if a person bought stock for $100,000 and sold it 10 years later for $400,000, they would have a capital gain of $300,000. The first $250,000 of that amount would be exempt from tax, so the person would owe the 7 percent tax rate only on the remaining $50,000 in gains, for a total tax payment of $3,500 on the $400,000 sale.  The tax does not apply to assets in retirement accounts, sales of real estate (including homes and farmland), livestock, timberlands, qualified small businesses and more.

Ten Washingtonians who claimed they would be subject to the tax filed a lawsuit challenging the new law. They are represented by, among others, former attorney general Rob McKenna and the Freedom Foundation. The plaintiffs argued that the tax is a tax on property, which makes it subject to restrictions in the Washington State Constitution, and that it also violated other constitutional provisions.

Washington Solicitor General Noah Purcell, as well as deputy solicitors general Jeffrey Even and Peter Gonick, and assistant attorneys general Cam Comfort and Charles Zalesky led the case for Washington.

Republican Response to Ruling

Sen. Lynda Wilson, Senate Republican budget leader, offered the following statement after Douglas County Superior Court Judge Brian Huber found the state income tax on capital gains passed in 2021 violates two sections of Washington’s constitution. 

“Judge Huber’s ruling is encouraging, but not surprising. When we were battling the majority Democrats on their income tax a year ago we predicted it would fail on constitutional grounds, and we saw through their claim that it’s an excise tax. The judge agreed on all counts.

“The Democrats who support the income tax probably expected this ruling too. Remember, their end game all along has been to get this tax in front of the state Supreme Court. They’re well aware five of the nine justices were appointed by either Governor Inslee or his predecessor, so they have to be hoping the court will lean their direction.

“The income tax is even less defensible today than it was last year, when the Democrats pushed it through. The majority would be smart to work with us to repeal the income tax before this legislative session is over next week. State government is sitting on a huge surplus, so it clearly has enough revenue already.”

Source Content: Office of the Attorney General of Washington state with contributions by Mario Lotmore