In the ongoing backlash against the newly-enacted capital gains income tax, a second group has filed a lawsuit against the measure. This time, a group of farmers is making an additional legal claim that undermines arguments stating that the law is an excise tax, and that either way, the tax violates the state Constitution or the U.S. Constitution.
“There is ‘nothing new under the sun’ when it comes to the ways Washington lawmakers and state income tax proponents have repeatedly attempted to work around Washington voters’ rejection of a state income tax,” the complaint states. The complaint was filed by the Opportunity For All Coalition (OFAC) on behalf of the plaintiffs; the organization was also involved in a previous lawsuit against the city of Seattle’s 2017 income tax ordinance, which was ultimately struck down by the Court of Appeals.
During the legislative session state lawmakers enacted ESSB 5096 which imposes a seven percent tax on the income derived from the sale of long-term capital gains greater than $250,000. A lawsuit was promptly filed in Douglas County Superior Court by the Freedom Foundation on the basis that the law violated the state constitution’s uniformity clause regarding property tax rates. Although proponents claim that the bill imposes an excise tax on the sale, the latest complaint states that the bill report “admits that capital gains are taxed as income under the federal tax code, and most states do not have separate capital gains tax rates.” Also, all states having a capital gains tax classify it as part of the income tax.
Proponents have openly stated the law is a tax on income when testifying during public hearings or issuing press release statements in response to the bill’s passage. Furthermore, recent public records from Sen. Andy Billig (D-3) reveal talking points in response to a proposed livestock exemption for the bill. The talking point says: “if farmers and ranchers are able to make more than $250,000 in profit each year while working less than half time, they can afford to pay seven percent on all profits above $250,000.”
Former Washington Attorney General Rob McKenna wrote in a statement that even if it is considered an excise tax, it violates the Dormant Commerce Clause of the U.S. Constitution, which prohibits a state from taxing an activity occurring in another tax.
“Whether they call it an income tax or an excise tax, it’s an illegal tax,” wrote McKenna in filing the legal complaint.
For opponents, the tax is little more than a thinly veiled effort to get the case in front of the State Supreme Court in the hopes that the justices will strike down almost 90 years of rulings since 1933 declaring income to be property under the state constitution’s extremely broad definition of anything “subject to ownership.”
That property definition was added to the constitution via an amendment in the 1930s for the express purpose of taxing the income derived from stocks and bonds as a separate class of property than real estate property.
Since then, voters have rejected an income tax 10 times – the latest in 2010. The State Supreme Court also refused to take up the 2017 case against Seattle’s income tax, despite urging by state legislators hoping that prior rulings would be reversed. Lawmakers also rejected a proposed amendment to ESSB 5096 that would have prohibited State Attorney General Bob Ferguson from requesting that the court reconsider income as property.
“The long game here is that they want to defy the will of the voters, who’ve rejected a state income tax ten times, and lay the groundwork for a statewide income tax that would impact most Washington residents,” OFAC President Collin Hathaway said in a statement. “This legislation is deceptive and harmful to Washington taxpayers and to businesses of all sizes.”