WA Supreme Court upholds capital gains tax just weeks ahead of collection deadline

The Washington Supreme Court has ruled in a 7-2 decision to uphold the constitutionality of the state’s new capital gains tax. The decision filed Friday comes just weeks before taxes are due.

The capital gains tax applies to profits over $250,000 from the sale of assets like stocks and bonds. The state estimates about 7,000 people will pay the tax in its first year.

Lawmakers approved the tax in 2021, but it was challenged in court with opponents arguing that it’s a type of property or income tax. Income taxes in Washington are subject to uniformity rules that disallow higher rates for wealthier people. The court’s majority rejected that argument, overturning a lower court’s decision and labeling the capital gains tax as an excise tax instead.

Democrats in Olympia are celebrating the decision – and its timing – as a win for education and for providing lawmakers “certainty” as they craft the state’s next two-year budget that includes additional funding for education and child care.

Senate lawmakers included the funding from the capital gains tax in their budget proposals released earlier in the week. It’s expected to bring in about $500 million a year, projected to reach nearly $2.5 billion in total collections over the next six years.

During a press conference shortly after the court’s decision, Gov. Jay Inslee said it’s a step to address inequities in the state’s tax structure, which the court’s majority opinion referred to as the “most regressive in the nation.”

“This decision today, now to a significant degree, rights that great unfairness,” Inslee said.

But the Association of Washington Business said it disagrees with the majority’s decision in a statement, calling the tax “unnecessary.”

“Instead of constantly looking for ways to raise more taxes, we encourage lawmakers to consider ways to invest in the economy,” AWB President Kris Johnson said in a statement.

Republicans are also criticizing the decision, saying it makes Washington an outlier in how it treats capital gains – the IRS and other states that have a capital gains tax define those gains as income.

Senate Republican Leader John Braun (R-Centralia) and others in his caucus say the decision also acts as a warning shot for possible tax increases in the future. He says a key concern is what’s next for the capital gains tax itself, as well as future legal cases that could reshape the state’s tax rules.

“How will the Democratic majority use this ruling to expand the capital gains tax to additional Washingtonians?” he said. “I think that what this ruling does is encourage the Democratic majorities that they have a friendly court.”

But the court’s opinion was limited in scope and did not overturn a nearly century-old court ruling that limits the state’s ability to apply different tax rules to peoples’ incomes – something Democrats, including Senator June Robinson (D-Everett), say should assuage fears of a possible income tax.

“I think the court ruled in favor of both people who like a capital gains tax, and people who are worried about an income tax,” Robinson said.

Collections for the tax are due for the first time April 18.