Superior Court judge rules state’s capital gains tax is an unconstitutional income tax.

Douglas County Superior Court Judge Brian C. Huber made it very clear in his ruling yesterday. The state’s capital gains tax, which lawmakers branded as an excise tax, is an unconstitutional income tax. 

As The Seattle Times reports, the victory for the opponents of the tax won’t be the last word.

A Douglas County Superior Court judge Tuesday struck down Washington’s new tax on capital gains, an initial blow to a major progressive victory that is expected to ultimately wind up before the state Supreme Court.

In a written order, Douglas County Superior Court Judge Brian Huber wrote that the tax, among other things, violated the state constitution’s uniformity requirement for taxes.

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

Huber — who was appointed by Democratic Gov. Jay Inslee in 2019 — also rejected the argument by Democratic lawmakers and others that the new law is an excise tax, rather than an income tax.

Paul Queary writes in the Washington Observer,

The ruling tees the issue up before the Supremes for a definitive revisitation of the original ruling from the 1930s that income is property. That’s the outcome that progressives are really looking for because it would clear the way in the future for further changes to a tax structure that falls heavily on the poor and lightly on the rich.

In the short term, the ruling creates some headaches for Ways and Means Chair Christine Rolfes and Appropriations Chair Timm Ormsby because it punches a pretty substantial hole in the state budget. The Supremes certainly won’t resolve the case before the Legislature’s scheduled to blow town next week.

The money from the capital gains tax was intended to pay for a big increase in state spending on child care and other early learning programs also adopted last year. It wasn’t due to start flowing until early next year, but it’s enough in the current budget cycle that they’ll have to figure out how to backfill. Luckily, there’s still a bunch of that federal pandemic aid we like to think of as Uncle Joe’s Pile of Cash (UJPoC) lying around, although majority Democrats had some other plans for all that dough.

Also reporting from Geek Wire,

Attorney General Bob Ferguson said his office will appeal the judge’s ruling.

“There’s a great deal at stake in this case, including funding for early learning, child care programs, and school construction,” Ferguson said in a statement. “Consequently, we will continue defending this law enacted by the peoples’ representatives in the Legislature.”

Collin Hathaway, president of the Opportunity for All Coalition, said in a statementthat “Judge Huber saw through the state’s attempt to enact this illegal capital gains income tax under the guise of an excise tax.”

Jason Mercier, with Washington Policy Center, whose work on how other states and the federal government treat the capital gains tax – it’s an income tax – was cited by those challenging the tax here, writes,

Former Attorney General Rob McKenna (one of the attorneys for the plaintiffs) told me about the ruling:

“This is not the first time a Washington court has rejected an attempt by the legislature to enact an unconstitutional income tax by labeling it an ‘excise tax.’ We appreciate Judge Huber’s careful consideration of those precedents in reaching a similar result in this case.”  

As the state Supreme Court reminded lawmakers in 1960, the proper way to impose a graduated income tax is with a constitutional amendment. It is past time to stop playing tax word games in an attempt to circumvent the voters’ consistent opposition to income taxes.

A capital gains income tax is unconstitutional in Washington. Full stop.

Next stop, the state Supreme Court.