NPI's Cascadia Advocate

Offering commentary and analysis from Washington, Oregon, and Idaho, The Cascadia Advocate is the Northwest Progressive Institute's uplifting perspective on world, national, and local politics.

Monday, January 24th, 2022

Lawsuits challenging Washington’s new state capital gains tax on the wealthy seek to re-rig our tax code in favor of the rich — indefinitely

Last year, Demo­c­ra­t­ic law­mak­ers took a sig­nif­i­cant step towards bal­ancing Wash­ing­ton’s upside-down tax code by tax­ing the sale and exchange of cap­i­tal assets. 

In pass­ing ESSB 5096, the Wash­ing­ton State Leg­is­la­ture artic­u­lat­ed the bill’s dual pur­pos­es: First, it stat­ed that the cap­i­tal gains tax is intend­ed to “fund K‑12 edu­ca­tion, ear­ly learn­ing, and child care, and advanc[ing] our para­mount duty to amply pro­vide an edu­ca­tion to every child in the state” and sec­ond, to make “mate­r­i­al progress toward rebal­anc­ing the state’s tax code.” 

Freeing our future: Artwork supporting a capital gains tax

Free­ing our future: Art­work sup­port­ing a cap­i­tal gains tax (Art­work on the grounds of the Wash­ing­ton State Capi­tol Cam­pus, pho­tographed by Bal­ance Our Tax Code)

These ambi­tions will come to naught if the pend­ing right wing chal­lenges to the law in Dou­glas Coun­ty Supe­ri­or Court are suc­cess­ful. 

Addi­tion­al­ly, the plain­tiffs’ view of the law, if accept­ed, would have sub­stan­tial impact on Wash­ing­ton beyond the case itself, dam­ag­ing the state’s abil­i­ty to effec­tive­ly respond to future pub­lic needs. 

This is because, if the plain­tiffs are to be believed, the state must yield to how oth­er gov­ern­ments think about their policies.

The plain­tiffs do not con­test the new cap­i­tal gains tax on only these grounds. 

The plain­tiffs have also alleged that the tax vio­lates the U.S. Con­sti­tu­tion, which is like­ly an attempt, if they fail in state courts, to exploit the will­ing­ness of the cur­rent con­ser­v­a­tive major­i­ty on the U.S Supreme Court to com­fort the com­fort­able. Per­haps doing dou­ble duty, these argu­ments fur­ther seem to col­lat­er­al­ly attack aspects of the state’s long-set­tled estate tax. 

At the cen­ter of the plain­tiffs’ claims is the asser­tion that, because states that tax income count cap­i­tal gains as income, and so does the fed­er­al gov­ern­ment, Wash­ing­ton must con­sid­er the cap­i­tal gains tax to be an income tax, too.

Because, under cur­rent Wash­ing­ton law, income is prop­er­ty, the plain­tiffs then posit that a cap­i­tal gains tax is a prop­er­ty tax that vio­lates the state Con­sti­tu­tion. To bol­ster this claim, the plain­tiffs go so far as to object to the state’s reliance on tax­pay­ers’ fed­er­al tax fil­ings and sup­port­ing doc­u­men­ta­tion to assess the tax, and its allowance for some, but not all, of the cap­i­tal loss­es for which the fed­er­al gov­ern­ment per­mits deductions.

Attorney General Bob Ferguson

Attor­ney Gen­er­al Bob Fer­gu­son’s office is respon­si­ble for the defense of ESSB 5096 (Pho­to: Andrew Villeneuve/NPI)

As a gen­er­al mat­ter, the state would be in trou­ble if it was required to accept the premis­es asso­ci­at­ed with all of the sources it relies on for infor­ma­tion. Addi­tion­al­ly, if the state required a redun­dant form, oppo­nents of the tax would sure­ly denounce the extra expens­es they would incur with com­pil­ing the infor­ma­tion for which it called. 

Fur­ther, the plain­tiffs are unable to explain why a cap­i­tal loss deduc­tion (which only lessens their tax bill) can­not in any instance be con­sis­tent with an excise tax. But, it appears one state’s admin­is­tra­tive effi­cien­cy is anoth­er person’s uncon­sti­tu­tion­al assessment.

While state courts can take ideas from oth­er states, accept­ing the plain­tiffs’ propo­si­tion would imper­mis­si­bly bind Wash­ing­ton to acqui­esce to the laws of leg­is­la­tures that are not our own, thus pre­vent­ing the state from gov­ern­ing itself in light of its unique chal­lenges, and — to para­phrase a for­mer Supreme Court jus­tice — from serv­ing as a lab­o­ra­to­ry of democ­ra­cy. 

Even if we were to accept the plain­tiffs’ argu­ment, the Attor­ney General’s Office has a salient rejoin­der: unlike Wash­ing­ton, the fed­er­al gov­ern­ment and most states con­sid­er an income tax to be an excise tax, not a prop­er­ty tax. Thus, tak­en to its ulti­mate con­clu­sion, the prin­ci­ple advanced by the plain­tiffs means a cap­i­tal gains tax still isn’t a prop­er­ty tax. 

And an income tax, if we had one, would­n’t be either. 

This com­pli­ca­tion aside, how­ev­er, the sole issue should be if the tax is an excise tax under Wash­ing­ton law. On this point, the plain­tiffs are wrong.

In con­flat­ing the cap­i­tal gains tax with an income tax, the plain­tiffs rely in places on mis­in­ter­pre­ta­tion, and in oth­ers on conjecture.

The plain­tiffs cite prece­dent, for exam­ple, that “the mere right to own and hold prop­er­ty can­not be made the sub­ject of an excise tax, because to tax by rea­son of own­er­ship of prop­er­ty is to tax the prop­er­ty itself.” How­ev­er, the cap­i­tal gains tax, in a prin­ci­ple the state grounds in an abun­dance of cas­es, does not tax the own­er­ship of prop­er­ty, but rather its disposition.

The few peo­ple poten­tial­ly liable for pay­ing the tax can keep their hold­ings free of it, and all they or their asset man­agers need to do is noth­ing (or, more specif­i­cal­ly, less than $250,000 a year of some­thing). How­ev­er, once they decide to sell or exchange assets which togeth­er equate to $250,000 or more in prof­it — the val­ue of the asset, and the mar­ket in which it trans­act­ed both fos­tered by the pro­tec­tions of the state — it is this trans­ac­tion from which the state col­lects a share to be able to con­tin­ue pro­vid­ing for the com­mon good.

To see this log­ic in action, con­sid­er Washington’s exist­ing estate tax, which is “a tax on the right to trans­fer prop­er­ty at the time of death.”

The line of prece­dent cit­ed by the plain­tiffs includes a num­ber of cas­es reaf­firm­ing the estate tax (or its rel­a­tive, the inher­i­tance tax) for the rea­son that it is an “impost or excise on the right to pass the estate and the priv­i­lege of the devisee to take.” And, as the Attor­ney Gen­er­al point­ed out, the Wash­ing­ton Supreme Court reaf­firmed in the last decade that the estate tax, as an excise tax, is a tax on “the hap­pen­ing of an event, name­ly, death, where the death brings about cer­tain described changes in legal rela­tion­ships affect­ing property.”

An author­i­ty that can under­stand a tax on some­thing so pro­found to be a tax on the trans­fer of prop­er­ty, but not the prop­er­ty itself, can under­stand this new state cap­i­tal gains tax on the wealthy, which tax­es the right to dis­pose of assets that have ben­e­fit­ed from an increase in val­ue, to be of a sim­i­lar nature.

(As an aside, the plain­tiffs also claim that, because indi­vid­u­als can­not always con­trol when an asset is sold, the cap­i­tal gains tax can­not be an excise tax. But, some­one, some­where, is mak­ing the choice to sell or exchange the asset, and, as the estate tax shows, a vol­un­tary choice isn’t strict­ly necessary.)

Nowa­days, inno­va­tion is often just anoth­er word for dereg­u­la­tion. But, in rec­og­niz­ing the legislature’s pol­i­cy­mak­ing pre­rog­a­tive, the courts should allow the peo­ple’s elect­ed rep­re­sen­ta­tives to exper­i­ment with improve­ments to the tax code. 

As with any tax, there may be instances in the future where this one is invalid­ly or improp­er­ly assessed, but that does not spell doom for the tax as a whole; in those instances, the valid­i­ty of the spe­cif­ic assess­ment will be deter­mined by estab­lished admin­is­tra­tive and judi­cial processes.

The Wash­ing­ton Supreme Court once wrote, when uphold­ing the state’s long­stand­ing busi­ness and occu­pa­tion tax:

Man in a state of nature gained his sus­te­nance by his strength or cun­ning, or both, and that which he so gained might, and no doubt often was, tak­en from him before he could use and enjoy it by some­one stronger and more cun­ning. Hence, the estab­lished state enact­ed laws for the pro­tec­tion of human rights, the rights of prop­er­ty, and to pre­vent the weak or the cred­u­lous from becom­ing the help­less vic­tims of the force or fraud of the strong and the cunning.

In a his­to­ry lit­tered with chal­lenges to what is prop­er­ly con­sid­ered an excise tax, the cur­rent law­suits are only the lat­est attempt to deny this rela­tion­ship, and to pre­vent the state from adopt­ing a more equi­table tax code. The courts should decline to let them.

Edi­tor’s Note: NPI alum Patrick Stick­ney is an attor­ney and the author of Mis­sives, a newslet­ter focused on Wash­ing­ton out­side of the Seat­tle area. All views are his own, and do not nec­es­sar­i­ly reflect the views of any­one else.

Sched­ul­ing note: Oral argu­ment in the legal chal­lenge to Wash­ing­ton’s new state cap­i­tal gains tax on the wealthy has been sched­uled for Feb­ru­ary 4th, 2022, in Dou­glas Coun­ty Supe­ri­or Court. If you’d like to read the briefs that have been filed in the case, NPI has begun post­ing them on this microsite.

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