Washington Supreme Court to hear challenge to new capital gains tax, bypassing Court of Appeals

The Washington Supreme Court will decide the legality of the state’s new capital gains tax, bypassing the Court of Appeals, in a case with hundreds of millions of dollars of tax revenue on the line and the potential to overturn decades of state Supreme Court precedent.

A Douglas County Superior Court judge earlier this year had deemed the tax unconstitutional, ruling that by imposing the tax only on the wealthy it violated the state constitution’s requirement that taxes be applied uniformly across classes of property.

The judge, Brian Huber, a 2019 appointee of Gov. Jay Inslee, ruled in March that the tax on capital gains over $250,000 a year, is an income tax, not, as Democratic lawmakers had argued, an excise tax.

The case was widely expected to be decided by the Supreme Court.

The capital gains tax, passed by the Legislature in 2021, was a major and long-sought progressive victory for Democratic legislators. It created a 7% tax on profits from the sales of stocks, bonds and similar investments. But the tax only applies to profits above $250,000.

The threshold represents both the aims of the legislation — to make Washington’s tax code more progressive by levying taxes on the wealthy — but also its constitutional vulnerability.

Washington is one of the few states without an income tax and the state Supreme Court has rejected a progressive income tax as unconstitutional while voters have repeatedly shot down proposed income taxes at the ballot box. That’s led to a state tax system that, by some estimates, is the most regressive in the nation, with poor residents paying a much higher share of their income than the wealthiest.

The Supreme Court on Wednesday said it would take up the case, skipping over the Court of Appeals, which would normally hear it first. Attorney General Bob Ferguson, who represents the state and is defending the capital gains tax, had asked the Supreme Court to decide the case.

The five justices who considered Ferguson’s appeal unanimously agreed to take the case.

The court is expected to hear oral arguments potentially around November, a court spokesperson said, although that could be pushed back if parties request an extension.

The capital gains tax would apply to about 7,000 Washingtonians a year and would have raised about $445 million starting this fiscal year, according to past estimates by the state Department of Revenue. The money would be deposited into the state’s Education Legacy Trust Account, where it can be used to pay for early learning and child care programs.

Challengers of the law, including the Washington Farm Bureau and several wealthy individuals who would be hit by the tax, have consistently argued that a capital gains tax is an income tax and is therefore unconstitutional.

“This is a really simple case — either we own our income or we don’t,” said Jason Mercier, director of the Center for Government Reform for the Washington Policy Center, a conservative think tank. “For nearly a century the court has consistently ruled that income is property and the voters have rejected six constitutional amendments to change that.”

The Supreme Court could potentially uphold Huber’s ruling deeming the tax unconstitutional; it could rule that the tax is an excise tax not an income tax; or it could decide that the state constitution does not forbid a progressive income tax, a decision that would upend decades of precedent.

Treasure Mackley, director of Invest in WA Now, a progressive advocacy group, praised the Supreme Court for agreeing to settle the issue.

“Most people want super rich Washingtonians to pay what they owe our communities for schools, child care, and much more,” Mackley said. “Millions of students, whether in preschool, high school, or technical college, are depending on the $500 million per year from this tax on the superrich.”