New capital gains tax faces court challenges

Jun 10, 2021
Written by Mark Johnson, Senior Vice President of Policy and Government Affairs

The highly controversial new capital gains tax has already picked up two separate court challenges. Both court challenges have been filed in superior court and are awaiting action.

During the 2021 Legislative Session, the Legislature and Governor narrowly adopted a 7% tax on capital gains over $250,000. WR opposed this measure on behalf of its small business members. The new tax was sold as only impacting the super-rich – this is not the case. It impacts many hard-working small business owners.

Here is the problem. Many small business owners work their entire life, often with great sacrifice and enormous financial risk, building up and growing their businesses. Their hope is someday to sell the business for a profit so that they can retire. The business “is” their retirement or a significant part of it. They have been paying Business and Occupation Tax, workers’ comp tax, unemployment tax, property tax, collecting the state sales tax, for years. Additionally, the business owners are often very active in their local communities, sponsoring youth athletics, faith-based organizations, local festivals, and other charitable operations. Now the state is asking them for an additional 7% when it comes time to sell and retire. This is wrong.

I expect whatever the superior court judges’ rule will be appealed by the losing party. That means the challenge will be before the State Supreme Court, where nine justices will have to decide if the capital gains tax stands. One of the chief arguments or debates is whether or not the capital gains tax is actually an income tax or an excise tax? Our state constitution clearly forbids a state income tax. Many attempts have been made to enact an income tax – all have failed. The City of Seattle tried recently and they were challenged and lost.

WR’s Board of Directors will soon be reviewing the merits of the court challenges and deciding whether the association will join the efforts to overturn this ill-guided new tax.