A group of individuals opposed to Washington State’s new state capital gains tax on the wealthy have prevailed in the initial round of their legal challenge, obtaining a ruling declaring the tax to be unconstitutional from Douglas County Superior Court Judge Brian Huber, who they selected to hear their lawsuit.
Represented by former Attorney General Rob McKenna, the group — known as the Quinn plaintiffs for short — is composed of folks who are adamantly opposed to rebalancing Washington State’s tax code and requiring the wealthy to pay their fair share in dues to secure the future of our great state.
Washington’s new state capital gains tax on the wealthy, which would be paid by only a few thousand of the richest households in the state, is one of the first serious steps ever taken to address Washington’s worst-in-the-nation, upside down tax code. Legislators made sure when developing it to exempt family farms, all real estate, and retirement accounts. There’s also a small business exemption. It is a tax that the vast majority of Washingtonians will never pay.
But among those Washingtonians who would pay it are some who really, really, really don’t want to pay. And they are backed by other right wing Republicans who wouldn’t have to pay the tax themselves, but nevertheless object to the idea of requiring the wealthy to do their part to secure our state’s future by investing in childcare, K‑12 public schools, and early learning.
Currently, the wealthy denizens of Washington State pay only up to 3% of their income in state and local taxes, whereas the lowest income Washingtonians pay up to 17–18% of their income in state and local taxes.
That’s because Washington barely taxes wealth at all, instead raising funding for its public services through taxes on things people buy (the sales tax) and on the homes people own (the property tax). The state’s new tax on capital gains is the first meaningful action taken in decades to correct this imbalance and require the wealthy to contribute a bit more towards Washington’s common wealth.
Republicans voted against the capital gains tax in the Legislature, but lost, much to their dismay. Now they’re hoping to nix the tax through this lawsuit.
The Quinn plaintiffs argue that the state’s new capital gains tax can’t be constitutional because the capital gains tax is really an income tax and the State Supreme Court has previously ruled (all the way back in the 1930s!) that income is property and can only be taxed at a uniform rate. The State of Washington says that the capital gains tax is structured as an excise tax, like the state’s estate tax, and holds up to constitutional scrutiny without a problem.
In his ruling today, Judge Huber agreed with the plaintiffs’ view of the state capital gains tax’s legality, adopting some of their legal reasoning in a letter to the parties, although not reaching all of their arguments. The legislation that created the state capital gains tax on the wealthy, Engrossed Substitute Senate Bill 5096 in 2021, is referred to as ESSB 5096 throughout Huber’s ruling.
“ESSB 5096 is properly characterized as an income tax pursuant to Culliton, Jensen, Power and other applicable Washington caselaw, rather than as an excise tax as argued by the State,” Huber wrote in his letter.
“As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on properly pursuant to that same caselaw.”
“This Court concludes that ESSB 5096 violates the uniformity and limitation requirements of article VII, sections 1 and 2 of the Washington State Constitution. It violates the uniformity requirement by imposing a 7% tax on an individual’s long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold. It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”
Huber’s full ruling is available from our State Capital Gains Tax Litigation Resource Center, which has an archive of case files that is free of right wing propaganda.
Many legal observers and supporters of the state capital gains tax had expected Huber to rule for the Quinn plaintiffs, and he fulfilled their expectations today. Douglas County Superior Court doesn’t usually hear constitutional challenges, but in this case it did because the plaintiffs went venue shopping, looking for a sympathetic judge who might rule in their favor in the initial round of litigation.
Attorney General Bob Ferguson, whose office is responsible for the defense of ESSB 5096, responded quickly to the release of the ruling, promising an appeal.
“There’s a great deal at stake in this case, including funding for early learning, child care programs, and school construction. Consequently, we will continue defending this law enacted by the peoples’ representatives in the Legislature. All the parties recognize this case will ultimately be decided by the State Supreme Court. We respectfully disagree with this ruling, and we will appeal.”
The Supreme Court, as its name implies, will have the final verdict in this case. Should the Supreme Court reverse Huber, the state capital gains tax would stand.
That’s an outcome that many on the right wing fear is likely, including disgraced initiative promoter Tim Eyman. Eyman, State Representative Jim Walsh, and others would like to overturn the capital gains tax through an initiative instead.
Our polling has repeatedly found a state capital gains tax on the wealthy to be popular with Washington voters. We were curious how the public might respond to an initiative from Eyman and Walsh to not only repeal the capital gains tax, but also ban income taxes. So, in one of our statewide polls last year, we read one of Eyman and Walsh’s ballot titles to voters and asked people to say how they’d vote. The ballot title polled dreadfully, with just 40% saying they’d vote yes.
Here’s the question we asked and the responses we received:
QUESTION: In November of 2022, there may be an initiative on the statewide ballot concerning state, county, and city taxes. The official description is as follows: This measure would prohibit the state, counties, and cities from imposing or collecting taxes it describes as “based on personal income,” and repeal a tax on certain sales of long-term capital assets. If the election were being held today, would you definitely vote yes in favor, probably vote yes in favor, probably vote no against, or definitely vote no against this initiative?
- Would vote yes: 40%
- Would definitely vote yes: 28%
- Would probably vote yes: 12%
- Would vote no: 34%
- Would probably vote no: 15%
- Would definitely vote no: 19%
- Undecided: 25%
Our survey of 909 likely 2022 Washington State voters was in the field from Wednesday, November 10th through Thursday, November 11th, 2021.
It utilizes a blended methodology, with automated phone calls to landlines (50%) and text message answers from cell phone only respondents (50%).
The poll was conducted by Public Policy Polling for the Northwest Progressive Institute and has a margin of error of +/- 3.3% at the 95% confidence interval.
Last spring, in another survey, we asked likely 2022 Washington voters if they supported or opposed our new state capital gains tax on the wealthy after presenting arguments for and against it. We tested Rob McKenna and Tim Eyman’s arguments against our own. Our arguments prevailed. You can read the question we asked, the responses, and our analysis in this post from last autumn.
It’s no doubt frustrating for Republicans to hear this, but the idea of levying a state capital gains tax on the wealthy is an idea that most voters support, even after hearing Republicans’ strongest arguments. This has consistently been the case over the span of more than half a decade. There’s no appetite among the electorate for a ballot measure to overturn ESSB 5096. Should wealthy Republicans bankroll one, they would be making a risky investment.
Why not just pay the tax? It’s dedicated to the Education Legacy Trust! Surely even those with billionaire fortunes can appreciate the return on investment of providing childcare, early learning, and an amply funded education to our youth.