Washington state voters could vote on the capital gains tax through a ballot measure. (Samuel Corum/Getty Images)
A legal challenge against Washington’s tax on capital gains hit a dead end as the U.S. Supreme Court said it would not hear the case.
While the tax applies to Washington residents, a group of taxpayers attempting to overturn the levy argued that it violates the U.S. Constitution’s commerce clause in how it applies to transactions that extend beyond the state’s borders.
But as the court case fizzles, a new threat to the tax has emerged with a ballot measure that could ask voters to scrap it.
The Legislature in 2021 approved a 7% tax on capital gains above $250,000 in a year for individual taxpayers. It applies to investments such as stocks and bonds but not real estate sales.
Last year, the Washington State Supreme Court concluded that the tax passed a test the U.S. Supreme Court has outlined for determining whether state taxes comply with the federal commerce clause.
The state Supreme Court also rejected claims that the tax ran afoul of income tax restrictions in Washington’s constitution. The tax, the court ruled, was rightly characterized as an excise tax because it is levied on transactions involving the sale or exchange of capital assets, not on assets or gains themselves.
Tax skeptics pilloried the court’s ruling, saying it was out of step with widely held understandings of what qualifies as an income tax.
“We always knew the odds were long, but we remain disappointed the U.S. Supreme Court did not take the opportunity to correct the flawed direction of our state,” Michael Gallagher, president and CEO of the Washington Policy Center, which opposed the tax, said in a statement.
Republican leaders in the Legislature had similar reactions. “It was kind of an esoteric argument,” said House Republican Leader Rep. Drew Stokesbary, R-Auburn, who is a lawyer. He, too, suggested the state Supreme Court had erred when it ruled the tax was not an income tax.
For progressives, the tax marked a major win in a state that does not have an income tax and has been long known for a “regressive” tax system that leans disproportionately on lower earners.
Revenue from the tax last year — the first year of collections — was nearly $900 million, money that will go to child care, education programs and school construction.
“The U.S. Supreme Court’s decision today was a huge victory for Washington kids and families,” Treasure Mackley, executive director of Invest In Washington Now said in a statement.
Last month, opponents of the capital gains tax turned in over 400,000 signatures to the Secretary of State’s Office in support of the ballot measure that would repeal the tax. The effort is backed by Let’s Go Washington, a conservative political committee sponsored by hedge-fund manager Brian Heywood.
The measure remains pending, with the Secretary of State’s Office yet to formally certify it to go before voters this November.
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