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Capital Gains Tax Unconstitutional

March 7, 2022

BIAW celebrated a huge victory in the courts when a superior court judge ruled Washington’s controversial capital gains income tax was unconstitutional. BIAW and the Washington Cattlemen’s Association filed a brief supporting the groups challenging the new tax.

In his March 1 ruling, Douglas County Superior Court Judge Brian Huber wrote:

ESSB 5096 is properly characterized as an income tax … rather than as an excise tax as argued by the State. As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on property…ESSB 5096 violates the uniformity and limitation requirements of Article VII, sections 1 and 2 of the Washington State Constitution.”

Article VII, Section 1 of Washington’s constitution says taxes must be uniform. Section 2 places a limit on the maximum annual property tax rate.

Huber said the new tax “violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold.”

He also said, “It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”

“We are pleased the court held lawmakers accountable and struck down this legislation as unconstitutional,” said BIAW General Counsel Jackson Maynard. “Judge Huber provided a solid ruling to guide the state Supreme Court in its decision. BIAW is prepared to continue to support this case to protect families and employers in Washington.”

Washington Attorney General Bob Ferguson issued a statement, saying he plans to appeal the decision.  BIAW stands ready once again to file briefs supporting the challenge.

Capital gains income tax effective Jan. 1, 2022

The Legislature passed the new capital gains income tax in 2021. It went into effect Jan. 1, 2022. The measure levies a 7% tax on capital gains above $250,000 from the sale of assets such as stocks and bonds. If the Supreme Court overturns the decision, first payments will be due in 2023.

Former AG McKenna leads challenge

Two groups filed suits challenging the tax in spring of 2021: one represented by the Freedom Foundation, the other, represented by former Washington Attorney General Rob McKenna.  The court combined the cases before the hearing.

BIAW joins the fight

BIAW and the Washington Cattlemen’s Association (WCA) filed a brief supporting the legal challenge in late December. Another group, including the Washington Policy Center, filed its amicus brief earlier that same week.

The amicus brief argued, among other things, the state treats capital gains differently than every other state and the federal government. This radical departure creates an undesirable inconsistency that will drive businesses out of our state.

“If Washington lawmakers are willing to ignore the constitution now to achieve their legislative agenda, will they do so again?” Maynard said. “No rational business owner wants to operate in an environment of legal uncertainty, under a tyrannical legislature that ignores constitutional limits on its power.

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