In a blow to progressives, Douglas County court strikes down WA’s new capital-gains tax

OLYMPIA — A Douglas County Superior Court judge Tuesday struck down Washington’s new tax on capital gains, an initial blow to a major progressive victory that is expected to ultimately wind up before the state Supreme Court.

In a written order, Douglas County Superior Court Judge Brian Huber wrote that the tax, among other things, violated the state constitution’s uniformity requirement for taxes.

“It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000,” Huber wrote, but imposes “zero tax on capital gains below that $250,000 threshold.”

Huber — who was appointed by Democratic Gov. Jay Inslee in 2019 — also rejected the argument by Democratic lawmakers and others that the new law is an excise tax, rather than an income tax.

Excise taxes have been considered constitutionally sound, whereas the state Supreme Court has rejected taxes on income as unconstitutional.

The new law is “properly characterized as an income tax,” he wrote, and should also be considered a tax on property.

Huber’s ruling comes after a Feb. 4 court hearing of legal challenges that were consolidated into a single case against the state.

The plaintiffs — which include owners of farmland and the Washington Farm Bureau — argued that the new law imposes among other things a tax on income. In that case, the new law could violate the state constitution, which holds that taxes are to be applied uniformly across the same classes of property.

In a statement Tuesday, the Opportunity for All Coalition, which has advocated against the capital gains tax, applauded the ruling.

“Judge Huber saw through the state’s attempt to enact this illegal capital gains income tax under the guise of an excise tax,” said Collin Hathaway, the organization’s president, in prepared remarks.

In a statement Tuesday, state Attorney General Bob Ferguson said he disagreed with the ruling and vowed to continue defending the law in the appeals process.

“There’s a great deal at stake in this case, including funding for early learning, child care programs, and school construction,” Ferguson said in prepared remarks. “Consequently, we will continue defending this law enacted by the peoples’ representatives in the Legislature.

“All the parties recognize this case will ultimately be decided by the State Supreme Court,” he added. “We respectfully disagree with this ruling, and we will appeal.”

The legal challenge came after Democratic majorities in Olympia in 2021 approved Senate Bill 5096. That legislation — which Inslee signed — created a 7% tax on the profits of sales of assets, such as stocks and bonds, above $250,000.

A long-sought priority for Democrats who despise Washington’s regressive tax system, the law went into effect in January. The first state tax returns under the law come due in 2023.

The new law exempts a variety of assets, like retirement accounts, sales of real estate, timber, livestock, and certain agricultural properties, as well as some auto dealerships. Also exempted are sales of sole proprietor businesses that have gross revenues as high as $6 million.

Progressives have long lamented the state’s regressive tax structure, which depends heavily on taxes of sales and businesses. Washington is one of a handful of states without an income tax. Due to that combination, people who make less money pay a higher share of their income in taxes.

In a statement Tuesday, Treasure Mackley, of Invest in WA Now, slammed the ruling.

“By siding with a tiny number of extremely wealthy residents, the lower court is ignoring widespread public support for helping working families find childcare and providing children with the education they need to succeed in life,” wrote Mackley, executive director of the progressive advocacy group.

“Washingtonians also strongly support making the super rich pay their fair share in state taxes because our state is the nation’s worst when it comes to tax fairness — those with the most money pay the least, while those with the least money pay the most,” she added.

The Washington Attorney General’s Office, which is defending the state in court, sought to dismiss the challenges partly because there’s no certainty that the plaintiffs would ever end up paying capital gains taxes themselves.

But in a hearing last September, Huber ruled that the case could move forward.

Both sides — as well as lawmakers — have generally expected appeals no matter the ruling, anticipating the case will eventually wind up before the state Supreme Court.

If those justices uphold the new law, it could still potentially go to the ballot box as an initiative for voters to consider.