Capital gains ruling threatens Progressives’ legislative victory
A Douglas County judge ruled Tuesday that the statewide capital gains tax, which progressive lawmakers pass last year, is unconstitutional. The decision involved two lawsuits that were consolidated into one, one by the conservative Freedom Foundation, the other by former Republican attorney general Rob McKenna.
The decision marks a victory for the ultra-wealthy in Washington, like Steve Gordon of Gordon Trucking and hedge fund manager Brian Heywood, who each contributed $20,000 an initiative campaign to repeal the tax; former Starbucks CEO Howard Beher contributed $5,000. Unsurprisingly, Attorney General Bob Ferguson, a Democrat, said he would appeal the decision to the state Supreme Court.
Douglas County Superior Court Judge Brian Huber wrote in his ruling that the 7% tax on the sale of intangible financial assets, such as stocks and bonds, violates the “uniformity clause” of the Washington constitution because it imposes “zero tax on capital gains below that $250,000 threshold. .” The uniformity clause prohibits the state from taxing different goods at different rates.
Democrats have argued that the tax is constitutional because it does not assess property, but rather the to sell of property, making it an excise tax and not an income tax. Huber rejected this argument, saying the plaintiffs “properly characterized [the capital gains tax] as an income tax” in their lawsuit. And since Washington views income as a form of property, any income tax would have to abide by the uniformity clause of the state constitution.
Washington is one of the few states in the country without income tax. The state instead relies heavily on trade and sales taxes to generate revenue. Democratic lawmakers have frequently criticized this model as regressive because it means people who earn less pay a higher percentage of their income in taxes than the wealthy. Democrats saw the capital gains tax as a way to reverse this regressive trend.
Following the judge’s ruling, state Attorney General Bob Ferguson said if the tax is ultimately reversed, the state could lose hundreds of millions of dollars in funding for child care programs, early learning and school construction projects. “Therefore, we will continue to defend this law enacted by the representatives of the people in the legislature. All parties acknowledge that this matter will ultimately be decided by the State Supreme Court. We respectfully disagree with this decision and will appeal.