An expert on Washington state courts, the late Charles H. Sheldon, once described the Washington State Supreme Court as a passive, but nonetheless political body. “Courts are political agencies because they authoritatively allocate values among members of society,” Sheldon advanced in his text, A Century of Judging: A Political History of the Washington Supreme Court (1988).
“The judges of the state’s court of last resort, wittingly or unwittingly, have been making public policy.”
This process was highlighted last month as the Court heard oral argument in the challenge to the state’s capital gains tax on the wealthy, which pit the State against a collection of individuals and trade associations (the Quinn plaintiffs) that allege their members will be subject to, and unlawfully harmed by, the tax.
Often, it is difficult to judge the outcome of a case based on oral argument because the observer cannot determine if the justices’ inquiries come from a place of conviction, or intellectual exploration.
While it is common for advocates to be subject to questions by the justices soon after their introduction, the vigor of the initial questioning of Solicitor General Noah Purcell, particularly by Justice Sheryl Gordon McCloud, prevented him from doing much more than repeat the points made by the State in its briefs as to why the capital gains tax is an excise tax.
That the Solicitor General was unable to provide deeper illumination of the State’s argument was detrimental to its case, as there was something about its argument that did not appear to fully click with the justices. However, the Solicitor General was able to make up for this in part during his rebuttal at the end of argument.
But, for most of the justices, their questions appeared to stem from exploration, and it is uncertain how most of the Court will decide this case.
Justice McCloud’s colloquies with the Solicitor General, to contrast, point to the conclusion that she will vote to decide that the capital gains tax is an income tax.
However, it won’t be clear until the Court publishes its decision whether her questioning was to persuade the Court to decide that it is required to address its precedent in Culliton v. Chase — a 1933 opinion which, infused with the right-wing judicial views of the era, determined that a tax on personal income is a property tax — and overturn it, or to dispose of the capital gains tax altogether.
If the Court does the former, it is probably better both doctrinally and for our state than to simply uphold the tax as an excise tax. And, the justices’ conception of judicial restraint will caution them from reaching the Culliton question if they can instead find for the capital gains tax on these grounds.
But, if this does occur, there is an aspect of the Court rejecting the State’s argument that would be broadly unfortunate.
As explained in the amicus brief of law professors submitted in support of upholding the tax, prior to the Lochner era, legislatures were accorded broad discretion in how they classified the taxes they levied for the common good.
During this era (named for the 1905 case Lochner v. New York, the now-discredited U.S. Supreme Court decision in which the Court found that states were prohibited from limiting the working hours of bakers for health and safety reasons), many right-wing judges imposed their own ideas of immutable natural law to limit the discretion of state legislatures in providing for the health, safety, and well-being of their residents. Culliton was one such decision.
Yet, even in the constrained idea of legislative power that emerged in this period, the Washington Supreme Court found, in an opinion issued the same day as its decision in Culliton, that the legislature can use the receipt of income to calculate the amount of an excise tax, a contrary position to that which forms many of the challengers’ claims.
Here, the legislature has decided that it is appropriate for the state to tax the transfer of capital assets, a type of transfer the Court has previously determined in other contexts is not a tax on the property itself.
The legislature has also determined that the way the tax should be measured is by the gains recognized upon the transfer of those assets — which is a limited tax more favorable to its payers than, say, also taxing their losses.
In the words of the law professors’ brief, for the Court to find against the capital gains tax because of this structure would extend Culliton “far beyond its holding and  disregard the Court’s extensive excise tax precedents.”
To add to this conclusion, such a decision would substitute a legislative determination as to the most efficient and functional way to administer the assessment of the tax with the Court’s own. Even if the Court were to render the distinction between the classification of the taxes mostly moot by declaring that income taxes are constitutionally permissible, its rejection of the capital gains tax as an excise tax would be a sad skepticism of nuance (nuance that was necessitated in many ways by Court and federal precedent) and the discretion of a legislative body to craft economic legislation in the public interest.
Pacifica Law Group’s Paul Lawrence, a Lynn Allen Award honoree who represented individual educators, the Edmonds School District, and the Washington Education Association argued that Culliton should be overturned if the Court decides that the capital gains tax on the wealthy enacted through ESSB 5096 is an income tax.
Lawrence ably demonstrated Culliton’s shaky underpinnings and the contortions that judges have gone through to justify or strike down certain taxes. While done in service of overturning the income-tax-as-property-tax line of cases, he showed how the distinction between an excise tax or income tax has been largely based on the disposition of the justices, emphasizing the Court’s previous treatment of taxes on the gross income of businesses and on the income of state employees as excise taxes. Both taxes use income as the method of measurement.
Lawrence’s argument undercut an immutability about the nature of the taxes that appeared accepted, or at least not publicly interrogated, by many of the justices.
Lawrence demonstrated that it is a judicial choice to emphasize or downplay certain aspects of the taxes brought before the Court.
Only Justice Raquel Montoya-Lewis appeared to suggest that these definitions aren’t “static” when questioning the counsel for some of the plaintiffs, a question former Attorney General Rob McKenna tried to answer even as he barreled through other attempts at questions by the justices.
McKenna’s co-counsel Callie Castillo spent the bulk of her time arguing against the tax on the grounds that it violates the Dormant Commerce Clause, a set of jurisprudence that has become an implied provision of the U.S. Constitution.
Featuring this argument, which came before McKenna’s, was odd, because, as the Solicitor General stated in his rebuttal, no other state’s capital gains tax has been found unconstitutional under this doctrine.
The U.S. Supreme Court has long found it permissible to tax intangible property based on the residence of the individual. To this, I’ll maintain that the plaintiffs’ argument seems to be an attempt to either muddy the issue using federal law or jump over the Washington Supreme Court and try to use the current right-wing majority on the U.S. Supreme Court as a vehicle to limit such taxes more broadly.
There will likely be much time yet to try to divine the meaning of the proceedings for the justices’ ultimate decision. While the Solicitor General requested that the Court expedite their decision and release it before the end of the legislative session, because of potential impacts to the budget, the Court is under no obligation to do so and has already stayed the trial court’s decision in favor of the Quinn plaintiffs, allowing the Department of Revenue to move forward, as Justice Madsen pointed out just before the end of oral argument.
However long it takes, until the decision is published it will be unclear which policy the justices will make when they define the law; but, it will be policy, regardless.
Editor’s Note: NPI alum Patrick Stickney is an attorney and resident of Tacoma. All views are his own and do not necessarily reflect those of any organization with which he is affiliated.