Anticipated second legal challenge to capital gains tax filed; former AG asks, “how many times do voters have to say no?”

Yesterday the Opportunity for All Coalition filed its expected lawsuit challenging the state’s new and controversial capital gains tax. The group says on its website,

The Opportunity for All Coalition (OFAC) filed a lawsuit today to strike down Washington’s capital gains tax that the state legislature enacted last month. The seven percent tax is unconstitutional and illegal, and we believe the courts will agree.

“This tax is the latest attempt by state legislators to defy Washington’s constitution which clearly prohibits an income tax over one percent,” said Collin Hathaway, OFAC President, owner of Guardian Roofing and CEO of home service company Flint Group. “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. This legislation is deceptive and harmful to Washington taxpayers and to businesses of all sizes.”

The Seattle Times reports,

Former Washington Attorney General Rob McKenna filed a lawsuit Thursday seeking to strike down the state’s new capital gains tax, arguing it is a stealthy and illegal income tax.

The lawsuit, filed in Douglas County Superior Court, was brought on behalf of several state residents, including owners of farms and manufacturing businesses, investors, and the Washington State Farm Bureau.

Among the issues is whether the Legislature’s characterization of the tax as an “excise tax” will hold water.

The Legislature called the new tax an “excise tax” on “the sale or exchange of certain capital assets” — not an income tax. But the lawsuit argues that’s a masquerade.

“Every taxing authority in the country, including the IRS and all other state revenue departments, agrees that capital gains are income,” the lawsuit states.

The ST continues,

In an interview, McKenna called the continued efforts to push an income tax “incredibly disrespectful … how many times do voters have to say no?”

The 17-page complaint is worth reading. This captures some of the main arguments, which are expanded upon later in the document.

 

Merely labeling the capital gains tax as an “excise tax” cannot avoid the fundamental fact that ESSB 5096 levies a tax on personal income. Following voter approval of an amendment to the state Constitution which expanded the definition of “property” to encompass everything, tangible and intangible, that is subject to ownership, the Washington Supreme Court ruled that income is property. The Washington Constitution prohibits taxes on property that are non-uniform (graduated) and that have a levy rate greater than one percent. For nearly a century, including most recently in 2019, Washington courts have followed and applied these constitutional rules and declared invalid every state or local government bill that imposed a nonuniform levy on income. There have been no exceptions, and ESSB 5096 does not create one. ESSB 5096 imposes a non-uniform tax on personal income in excess of the maximum one percent allowed under the Constitution, and so is illegal and invalid.

The bill-related communications among legislators for Senate proceedings belies the true intention that ESSB 5096 tax personal income. In floor notes for the Senate Democratic Caucus instructing its members to vote down an amendment to exempt livestock sales from the excise tax, the Caucus offered this revealing “Talking Point”: “[i]f 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 7% on all profits above $250,000.” This is a classic description of a tax on annual income, not an excise on voluntary transactions.

In consequence, another primary motivation behind the passage of ESSB 5096 was to set up a “test lawsuit” to urge the Washington Supreme Court to overrule this longstanding precedent prohibiting a state income tax absent a constitutional amendment. The Legislature is seeking to put the question to the Supreme Court because the voters have rejected ten initiatives or referendums to impose an income tax on the people of Washington. And the Legislature seeks to overcome that resistance by judicial fiat rather than risk yet another voter rejection of their efforts to amend the Constitution. Indeed, the Legislature is so convinced that voters would reject this tax if given the opportunity that they inserted an “emergency declaration” in ESSB 5096 in a transparent effort to prevent the people from having their say, effectively disenfranchising the entire voting public.

Plaintiffs now seek a declaratory judgment and permanent injunction that ESSB 5096 is unlawful and invalid because (1) it is an illegal excise tax on income, (2) it was enacted in violation of Article VII, Section 1 of the Constitution of the State of Washington, (3) it was enacted in violation of Article VII, Section 2 of the Constitution of the State of Washington, and (4) it was enacted in violation of the Commerce Clause of the United States Constitution.

Earlier we discussed the first lawsuit filed challenging the tax. The ST writes,

The lawsuit filed Thursday is the second to be brought against the capital gains tax. The Freedom Foundation, an Olympia-based conservative think tank, filed a lawsuit in late April, before the bill had been signed into law.

McKenna said he expects the two lawsuits will be combined and considered together by courts.

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