A Douglas County judge has consolidated two lawsuits filed by the Freedom Foundation and the Opportunity for All Coalition (OFAC) against the state’s newly enacted capital gains income tax, though he refrained from addressing the legal arguments.
State Attorney General Bob Ferguson, who has filed a motion for the lawsuits to be moved to Thurston County or dismissed on the claim that the plaintiffs lack standing because they haven’t yet paid the tax, has also cited the tax’s notorious volatility due to changes in the stock markets, stating that the plaintiffs don’t know if the tax’s $250,000 exemption threshold will even apply to them.
Incidentally, the tax’s volatility is regularly noted by its critics; in California, the voters approved a policy separating that revenue from the regular budget writing process, and the Washington State Department of Commerce prior to this year had touted the state’s lack of a capital gains income tax as a benefit to residents. Commerce officials have also described its absence as a “selling point” for attracting new businesses to the state.
Douglas County Superior Court Judge Bryan Huber will also have to consider the plaintiffs’ numerous arguments against the tax – mainly that it violates the state constitution’s uniformity clause regarding tax rates on the same class of property. The state constitution defines property as anything tangible and intangible “subject to ownership.” That definition was added via an amendment in the 1930s to tax the income from stocks and bonds at a separate rate than land, according to proponents at the time. For more than 80 years the State Supreme Court has ruled unanimously that income is property under the constitution’s definition.
Both lawsuits are also making an additional argument based on the assertion by the tax’s defenders that it is an excise tax; if so, it violates the U.S. Constitution’s Commerce Clause by levying a tax on people in other states.
“The state is pushing this unconstitutional tax hoping that the courts will ignore legal precedent and allow its implementation which would only open the door to allow an income tax for all Washingtonians,” OFAC president Collin Hathaway said in a statement following the July 14 hearing. “We are confident that any court in Washington would agree that this tax is illegal and look forward to the next hearing date.”
At the same time, the Edmonds School District and the Washington Education Association may be allowed to join the suit on the side of the defendants. As written in the bill, the seven percent tax on the income from the sales of capital gains will pay for basic education programs. Huber said at the July 13 hearing that he will issue a decision on whether those parties will be permitted to join.
In 2017, the Economic Opportunity Institute (EOI) was permitted to join the city of Seattle in its unsuccessful defense of its graduated income tax ordinance; although it was struck down, EOI successfully managed to convince the Court of Appeals that a 1984 state law prohibiting a local income tax violated the state’s single subject clause requirement. The State Supreme Court refused to consider reviewing the case, allowing the lower court ruling to stand.
A follow-up hearing will be scheduled within 30 days.