Judge clears way for initiative to repeal capital gains tax

OLYMPIA — A Thurston County judge cleared the way Thursday for opponents of the state’s new capital gains tax to begin gathering signatures on an initiative to repeal the law.

Sponsors of Initiative 1929 got the green light after Thurston County Superior Court Judge Indu Thomas approved final wording for how the measure would be described on the ballot and the initiative petitions.

However, it wasn’t immediately clear when, or if, they would proceed with collecting signatures.

“We don’t comment on that,” said Mark Funk, a spokesman for Repeal the Capital Gains Income Tax, the political committee behind I-1929.

Supporters of the capital gains tax expect it will happen in the next few days. They launched a barrage of verbal salvos Thursday.

“Washington already has the most upside-down tax system in the nation and passage of I-1929 would allow the ultra-wealthy to tip that scale even more in their favor by creating a new loophole so they can avoid paying taxes on their windfall profits,” said Misha Werschkul, executive director of the Washington State Budget & Policy Center, a non-partisan research organization.

At issue is a law signed by Gov. Jay Inslee in May 2021. It took effect Jan. 1, and it’s projected to generate $415 million for early learning and child care programs in 2023, the first year of collections.

Under the law, a capital gains tax will be levied on annual profits reaped from the sale of long-term assets, such as stocks and bonds, for some individuals and married couples. The state will collect 7% of those profits above $250,000. The law contains exemptions for retirement accounts, real estate and some agricultural and small businesses.

An estimated 7,000 taxpayers could be subject to the new tax, according to a 2021 fiscal analysis.

Initiative 1929 would erase the 2021 law from the books.

Sponsors will have to work rapidly if they want to get the measure on the November ballot.

To qualify, they must collect and turn in signatures of 324,516 registered Washington voters by 5 p.m. July 8. They will need to turn in closer to 400,000 signatures to account for invalid or duplicate signatures.

It’s doable. In 2018, backers of Initiative 1639 gathered 378,ooo signatures in a month to get on the ballot. Voters did approve the measure, which contained several new gun-related restrictions, including boosting the legal age for buying a semiautomatic assault rifle.

Should I-1929 petitions get circulated, opponents won’t be sitting idly by. They set up a hotline Thursday that people can call to report where they see signature-gatherers at work. It’s possible they may deploy people to those sites to provide a visual and verbal counterpoint.

“We are going to make it as expensive and uncomfortable for them as possible,” said Heather Weiner, a spokeswoman for Invest in Washington Now, which is part of a coalition of opposition groups. “We will not interfere with them. We also want to make sure people have the facts.”

This has the makings of an expensive ballot battle.

As of Wednesday, Repeal the Capital Gains Income Tax had reported raising $259,000, including $100,000 from Stan Baty, a founder and general partner at Columbia Pacific Advisors in Seattle. It has lined up $470,000 in pledges, according to reports filed with the Public Disclosure Commission.

Sponsors also had spent most of what they raised, including $70,000 to Moore Information Group for polling research and roughly $71,000 to consultants.

No Tax Cut for the Super Rich, the political committee for initiative foes, had collected and spent roughly $32,000 as of Thursday, according to reports. It has lined up $200,000 in pledges.

Meanwhile, a lawsuit challenging the legality of the capital gains tax is making its way through the courts.

In March, Douglas County Superior Court Judge Brian Huber ruled it is an unconstitutional tax on income.

In his decision, Huber cited several elements of the law that he said “show the hallmarks of an income tax rather than an excise tax,” including a reliance on federal IRS tax returns that must be filed by Washington residents; the fact it is levied annually instead of at the time of the transaction; and that it is based on an aggregate calculation of capital gains over the course of a year.

Huber also noted that like “an income tax and unlike an excise tax,” the capital gains tax statute allows a deduction for certain charitable donations the taxpayer makes during the tax year.

Attorney General Bob Ferguson said at the time that his office would appeal to the state Supreme Court.

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

Jerry Cornfield: 360-352-8623; jcornfield@heraldnet.com; Twitter: @dospueblos.