Legal challenge to capital gains tax will go forward. Judge rejects state’s effort to have case dismissed.

As The Seattle Times reports, a Douglas County judge has rejected the state’s attempt to throw out the legal challenge to the controversial new capital gains tax adopted by the Legislature.

A Douglas County judge ruled Friday that a legal challenge to Washington’s new tax on capital gains can move forward.

The ruling by Douglas County Superior Court Judge Brian Huber sets the stage for a debate that ultimately could be settled at the state Supreme Court: Is the new capital gains tax constitutional?

The legal challenge takes aim at Senate Bill 5096, which passed this spring through the Democratic-controlled House and Senate and was signed by Gov. Jay Inslee. It creates a 7% tax on the capital gains of sales of assets — like bonds and stocks — above $250,000. The law — a long-sought priority for Democrats who chafe at Washington’s regressive tax system — takes effect January 2022, with the first state tax returns coming due in 2023.

To the question of the constitutionality of the tax, we again refer you to remarks made by a University of Washington tax law professor

Asked if the capital gains tax will pave the way for a Washington state income tax, Schumacher responds,

“I don’t think so. To the extent that this is an income tax, and I think it is, it’s going to be found unconstitutional.”

The state wanted to have the challenge dismissed.

The state Attorney General’s Office, which is tasked with defending the state in court, sought to dismiss the challenges in part because there’s no certainty the plaintiffs would ever actually pay the tax themselves.

But in his order, Huber rejected that argument. He cited, among other things, an allegation by plaintiffs that the new tax has already “lowered the market value of their property and forced them to make tax planning decisions that impact their financial interests in a way that is concrete and non-speculative.”

The judge also denied a request by the Attorney General’s Office that the case be moved to Thurston County if it were to proceed.

The Opportunity for All Coalition which is challenging the capital gains tax said in a statement,

he Opportunity for All Coalition (OFAC) Friday praised Douglas County Superior Court Judge Bryan Huber’s decision to deny Washington state’s request to dismiss the lawsuit seeking to strike down the illegal capital gains income tax.

“We are pleased that Judge Huber denied the state’s move to dismiss the case against the capital gains income tax,” said OFAC president Collin Hathaway. “The tax hurts Washington state from a competitive standpoint, but the bottom line is that it’s unconstitutional. If the courts allow it to move forward, the tax would be the first step toward a general income tax that could impact every Washington state taxpayer.”

Former Washington Attorney General Rob McKenna of Orrick is representing plaintiffs who would be subject to the tax. “Judge Huber made the right decision today to allow our case to move forward in Douglas County,” McKenna said. “This tax is illegal because it is unconstitutional. Voters have rejected proposed income taxes ten times and the courts have rejected the Washington legislature’s past efforts to enact an income tax by labeling it an ‘excise tax.’ We are confident the courts will reach the same conclusion in this case.”

Possibly why the state wants to keep the legal challenge from going forward.