OLYMPIA — A judge has struck down a new capital gains tax on high-yielding stocks, bonds and other assets that was approved by the Washington Legislature last year, ruling it to be a unconstitutional income tax.
In his written ruling released Tuesday, Douglas County Superior Court Judge Brian Huber agreed with opponents of the new tax who had argued it was an income tax that violates previous decisions of the state Supreme Court and the state constitution, because it is not a flat tax on property. .
Huber cited several elements of the law that he said “show the characteristics of an income tax rather than an excise tax,” including reliance on federal IRS tax returns that must be produced by residents of Washington, the fact that it is levied annually instead of at the time of the transaction, and that it is based on an aggregate calculation of capital gains during a year.
“The state refers to the new tax status as a ‘tax that applies on the sale or transfer of property’ and argues that these taxes are excise duties,” he wrote. “But as noted above, the new tax is not levied on the ‘sale or transfer’ of fixed assets. Instead, the new tax law levies a tax on the receipt, and therefore ownership, of capital gains.
Attorney General Bob Ferguson said in an email Tuesday that his office would appeal to the state Supreme Court.
“There’s a lot at stake in this deal, including funding for early learning, child care programs, and building schools,” he wrote. “Therefore, we will continue to defend this law enacted by the people’s representatives in the Legislative Assembly.”
The measure imposed a 7% tax on the sale of stocks, bonds and other high-end assets over $250,000 for individuals and couples. It was expected to bring in $415 million in 2023, the first year the state would see the tax money.
The legal challenge stems from two lawsuits that were later consolidated. The first was filed last April by The Freedom Foundation, an Olympia-based conservative think tank. A month later, former Washington Attorney General Rob McKenna filed the second on behalf of state residents, including manufacturing business owners, investors and the Washington State Farm Bureau.
“Washington courts have twice rejected earlier efforts by the legislature to enact an unconstitutional income tax, while Washington voters have rejected 10 consecutive ballot measures, including six proposed constitutional amendments, that would have created a progressive state income tax,” McKenna said in a statement. “Judge Huber’s ruling rightly confirms these precedents and honors the clearly expressed preference of voters that we remain a state without progressive income taxes.”
Proponents of the tax say Washington — one of the few states that does not impose a payroll tax — relies too heavily on its sales tax, disproportionately affecting those with lower incomes. When the governor signed into law the new tax last May, Washington joined 41 states plus the District of Columbia in having a capital gains tax.
Retirement accounts, real estate, farming and forestry were all exempt from the tax. Business owners were also exempt from tax if they were regularly involved in operating the business for five of the previous 10 years before selling, owning it for at least five years, and $10 million. gross or less one year before the sale.
Under the new law, taxpayers could deduct up to $100,000 a year from their capital gains if they made more than $250,000 in charitable donations in the same tax year, which Huber cited in its ruling, noting that as “an income tax and unlike an excise tax, the new tax law provides a deduction for certain charitable donations that the taxpayer has made during the tax year.
Since the state wasn’t expected to collect revenue from the tax until next year, that doesn’t affect the work lawmakers are doing on the state’s supplementary budget this year.