A Douglas County Superior Court judge has rejected a motion by the state to dismiss a lawsuit against its capital gains income tax, citing many of the legal arguments made by the plaintiffs during a recent oral argument, allowing the lawsuit to proceed.
Judge Brian Huber in his Sept. 10 decision also rejected a request by the state to move the case over to Thurston County, writing that “no valid reason has been presented by the state to overcome the presumption that the plaintiffs in this case are entitled to choose the forum for deciding the case. The state has not presented any persuasive legal authority that this must or even should do so, particularly over the objection of the plaintiffs.”
The consolidated lawsuit was filed by two separate groups of plaintiffs earlier this year after the state legislature passed a tax on the long-term income derived from capital gains. However, Washington Policy Center Government Reform Director Jason Mercier told Lens that this new decision had less to do with the actual tax’s legality and more with “whether or not the taxpayers had the right to challenge an unconstitutional tax in a court of their choosing. This is just our right to challenge a tax we believe is unconstitutional.”
State Attorney General Bob Ferguson had argued that the plaintiffs could not sue the state until they actually paid the tax, citing a statute which says injunctions or restraints can be imposed on a tax on the grounds that it violates either the state or federal constitutions.
The plaintiffs argued that it violates both, and a bill report obtained by Mercier from the state Department of Revenue seems to bolster that claim. The report states that the charitable deduction contained within the new law “likely incrementally strengthens the argument that the capital gains tax is an income tax.” The plaintiffs allege that the tax violates the federal Commerce Clause by imposing the tax on people outside Washington’s jurisdiction.
During an Aug. 18 oral argument former state attorney general Rob McKenna, who represents the plaintiffs, said that the court could consider “hypothetical facts” to allow the lawsuit to continue, an argument Huber reaffirmed while referencing the 2009 decision in Kinney v. Cook.
At stake in the case is whether or not the new law imposes an excise tax or an income tax, and if the latter, whether income is property as defined by the state constitution and subject to its uniformity clause. While the city of Seattle didn’t contest that its 2017 graduated income tax was anything but, the new capital gains income tax is being portrayed as an excise tax.
However, Mercier said that “you can’t find any tax professional in the world that agrees” with that assertion. “How Washington is going to argue that they know what nobody knows is going to be fascinating to see. It doesn’t matter if you’re the most-hard core Bernie Sanders ‘tax the rich until they can’t breathe’ [supporter], there’s no dispute outside the state of Washington a capital gains tax is a tax on income.”