Quinn plaintiffs obtain ruling striking down Washington’s capital gains tax on the wealthy

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.

Said Fer­gu­son:

“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.

Last year, they tried to drum up inter­est in such a scheme, but could­n’t find wealthy bene­fac­tors will­ing to under­write a sig­na­ture dri­ve.

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?

ANSWERS:

• 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.

More infor­ma­tion about the survey’s method­ol­o­gy is avail­able here.

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.