Though Governor Jay Inslee has yet to sign ESSB 5096 passed by the state legislature this session that imposes a seven percent income tax on long-term capital gains, opponents have already filed a lawsuit against it in Douglas County Superior Court.
The legal challenge involves high stakes for both sides, as it will come down to whether the State Supreme Court will ultimately review the case – and if so, whether it will reaffirm or overturn eight decades worth of rulings that have declared that income is property under the state constitution.
Representing the plaintiffs in the case are the Freedom Foundation and Lane Powell, PC, which were both involved in the successful legal battle over the city of Seattle’s 2017 income tax ordinance. The tax was struck down in the Court of Appeals, though the decision also declared illegal a 1984 state law banning local income taxes. The state high court refused to hear the case.
“How many times do we have to go down this road?” Freedom Foundation CEO Aaron Withe said in a statement. “Capital gains are clearly income. And when you tax them, it’s an income tax — no matter what you choose to call it.”
ESSB 5096 places a seven percent tax on the profits derived from the sale of long-term capital gains of more than $250,000, with some types exempted from law. However, an amendment to the state constitution defines property as anything “subject to ownership,” a clause added in the 1930s in order to tax the incomes from stocks and bonds at separate rates than real estate property. The State Supreme Court has ruled since then that income is classified as property and subject to both the uniformity clause regarding tax rates as well as the one percent property cap.
“The Washington Constitution is unambiguous,” Withe said in a statement. “Taxpayers can’t be treated differently based on the amount of their income. It’s both punitive and illegal.”
In addition to violating the state constitution’s uniformity clause and one percent property cap, the lawsuit also argues the tax also violates the constitution’s privileges and immunities clause found in Article 1 Section 12 and state resident privacy rights under Article 1 Section 7. Further, the lawsuit claims the tax violates the federal Constitution’s Commerce Clause by taxing the resident based on residency rather than where the sale took place.
Opportunity for All Coalition President Collin Hathaway said in a statement that the organization intends to file a lawsuit as well. “Washingtonians have rejected income tax measures 10 times before. The state’s constitution clearly prohibits this type of tax, something that its supporters know. On top of that, it is totally unnecessary given current state budget surpluses, and will only serve to inhibit job creation and economic prosperity.”