OLYMPIA — The state Supreme Court upheld Washington’s controversial new capital gains tax on Friday, calling it a “valid excise tax under Washington law.”
The 7-2 ruling overturns the March 2022 ruling by a Douglas County Superior Court judge that concluded it is an unconstitutional tax on income.
The measure took effect last year and first payments are due on or before April 18. The tax imposes a 7% tax on gains made from the sale of stocks, bonds, and other high-end assets in excess of $250,000 for both individuals and couples. It is expected to raise a half-billion dollars a year from roughly 7,000 taxpayers.
“The capital gains tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves,” Justice Debra Stephens wrote for the majority. “The capital gains tax is a valid excise tax under Washington law.”
Senate Democrats penciled in $1 billion from the tax in their proposed 2023-25 budget released Thursday. At the time, Sen. Christine Rolfes, D-Bainbridge Island, the chair of the Senate Ways and Means Committee, said if the tax was tossed, lawmakers could cover the loss with reserves and consider options in the 2024 session.
House Democrats are set to release their proposed budget Monday.
The law was enacted in 2021 and immediately drew two legal challenges that were later consolidated. The first was filed by The Freedom Foundation, an Olympia-based conservative think tank. A month later, former Washington Attorney General Rob McKenna filed the second on behalf of state residents including manufacturing business owners, investors, and the Washington State Farm Bureau.
The Supreme Court heard the case Jan. 26.
Opponents have argued the capital gains tax is an income tax barred by the state constitution.
In court, Solicitor General Noah Purcell argued on behalf of the state that it is an excise tax and not a tax on income.
Supporters of the tax say that Washington — one of nine states with no income tax on wages — leans too heavily on its sales tax, disproportionately affecting those with less income. When Gov. Jay Inslee signed the new tax into law, Washington joined 41 states plus the District of Columbia in having a capital gains tax.
Retirement accounts, real estate, farms and forestry are exempt from the tax. Business owners are also exempt from the tax if they are regularly involved in running the business for five of the previous 10 years before they sell, own it for at least five years, and gross $10 million or less a year before the sale.
Under the law, taxpayers can deduct up to $100,000 a year from their capital gains if they made more than $250,000 in charitable donations in the same tax year.
Douglas County Superior Court Judge Brian Huber cited this element in his 2022 ruling, noting that like “an income tax and unlike an excise tax, the new tax statute includes a deduction for certain charitable donations the taxpayer has made during the tax year
This is a developing story. Check back for updates
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