Washington state capital gains tax update: Attorney general wants to appeal to reinstate controversial law

Bob FergusonWashington State Attorney General Bob Ferguson. (GeekWire file photo / Dan DeLong)

In an effort to overturn a lower court ruling that blocked Washington state’s new capital gains tax, the attorney general’s office on Friday asked the state’s Supreme Court to hear the case on appeal.

Attorney General Bob Ferguson’s decision to attempt to bypass the appeals court is essentially a legal admission that the battle over what constitutes an income tax is very likely to end in Washington’s highest court anyway. The state’s Supreme Court may dismiss the direct appeal, but some legal experts said it’s unlikely.

“In cases like this, it seems likely because both sides would appeal an appeals court decision they disagreed with,” said Hugh Spitzer, a law professor at the University of Washington and an expert on constitutional law. “I think[the Supreme Court of the state]will grant the appeal, just to save time and effort for everyone.”

Others are not so sure. Eric R. Stahlfeld, an attorney with the Freedom Foundation who represents one of the anti-tax groups, said the Supreme Court recently declined to hear a similar Seattle case. In 2017, when the city tried to appeal to the state’s highest court over the successful challenge of its own income tax, the court refused.

“There is no guarantee that the state Supreme Court will hear this case immediately,” Stahlfeld said.

It is the capital gains tax approved by the legislature and signed by Governor Jay Inslee in 2021. The legislation imposed a 7% tax on the sale of stocks, bonds and companies – the first tax of its kind in state history.

The excise tax was not universally popular in the tech community, as its ultimate purpose was to tax a common form of compensation for the industry: stocks and stock options.

But the tax would have been applied strictly only to capital gains over $250,000. And it would exempt a laundry list of other potential capital gains, including real estate land and structures; retirement accounts; livestock for agriculture or ranching; and the sale of timber and farmland, among other exceptions.

A successful lawsuit filed in Douglas County blocked the new law three weeks ago. The plaintiffs argued that a capital gains tax, even when called an excise tax, amounts to an income tax similar to how it is categorized by the Internal Revenue Service.

RELATED: Washington State’s New Capital Gains Tax Has Been Declared Unconstitutional by Lower Court

And as an income tax, it does not come through the law as per the state constitution.

In his ruling, Douglas County Supreme Court judge Brian Huber said in a written decision that the tax “shows the characteristics of an income tax rather than an excise tax,” as argued by state lawmakers.

At the time of the ruling, Ferguson promised to fight and hinted that the state would appeal directly to the Supreme Court. “All parties recognize that this matter will ultimately be decided by the state Supreme Court. We respectfully disagree with this ruling, and we will appeal,” he said in a statement.

The appeal, Spitzer said, will likely relate to the ruling that has sparked so many legal disputes over state and income taxes: Culliton v. Chase.

Decreed in 1933, the state Supreme Court quashed a popular voter-approved graduated income tax when it ruled that income is property. State law dictates—then and now—that property taxes should be uniform at 1%, not graduated. So if income is considered real estate and real estate can only be taxed at 1% across the board, any income tax must be 1% or less under state law.

The legally signed capital gains tax for 2021 is 7%.

But Spitzer said the judges were wrong then. In the other 49 states, income is not considered property. This appeal, he said, is an opportunity to rectify nearly 90 years of flawed legal reasoning.

And on a more practical level, a tax on an event is an excise or sales tax, which is perfectly legal in Washington state. The tax on the sale of shares is an event. The shares are not taxed at all until they are sold.

“I think the judge was wrong and misspelled it,” Spitzer said. “I think (Judge Huber) just didn’t understand.”

Still, the battle might not end with the state’s Supreme Court, should it decide to grant the direct appeal. Currently, a handful of votes against a capital gains tax have been filed with the Secretary of State’s office.

No one has collected enough signatures for the vote yet. But the one that probably gets the most attention hasn’t been given a number yet: the Capital Gains Tax Repeal initiative.

Simply put, the measure aims to repeal any law in Washington state that imposes a capital gains tax. While there is currently no capital gains tax, the initiative would cancel it if reintroduced.

Political adviser Heather Weiner likened it to a fail-safe or backup plan for tax opponents.

And Weiner, spokesman for Invest Washington, which helped pass the capital gains tax last year, said she expects this particular initiative to stand out from the pack with its ability to bring in national money and political agents.

“It’s not Tim Eyman’s clown car,” she said, referring to the state’s anti-tax attorney.

This post Washington state capital gains tax update: Attorney general wants to appeal to reinstate controversial law

was original published at “https://www.geekwire.com/2022/washington-state-capital-gains-tax-update-attorney-general-seeks-appeal-to-reinstate-controversial-law/”