After decades and dozens of attempts to overturn Washington State’s ban on income taxes, the Washington State Supreme Court upheld a new 7% tax on capital gains. Since 1933, Washington courts have defined income as property—barring lawmakers from imposing income taxes without an amendment to the state’s constitution. The state can now legally tax income on capital gains via an excise tax.
A 7-2 majority ruled that the tax on capital gains passed by the Legislature in 2021 is an excise tax rather than a tax on property or income. That redefinition let the judges say the tax is constitutional without having to overrule its 90-year precedent prohibiting an income tax on Washingtonians.
The Wall Street Journal’s opinion piece on the court’s decision clarifies, “The majority’s logic contradicts common sense, nearly a century of state law, and the view of the U.S. Internal Revenue Service, which defines capital gains as a form of income. The majority opinion boasts that ‘forty-one other states and the District of Columbia tax capital gains.’ Yes, and every one considers capital gains to be income.” And every country as well.
For the first time, a state has permitted an excise tax, confined within its boundaries, to extend beyond the state lines, which could potentially breach provisions of the Federal Commerce Clause.
As a result of the court’s decision, residents of Washington can anticipate a future where they will face increased taxes on both property and investment.
Potential next steps by the opponents of the excise/income tax—the Opportunity for All Coalition—could include filing an appeal to the US Supreme Court or collecting signatures and filing an initiative to the people for a November vote—at an estimated cost of $7-$10 million.
