Aerial vew of the Washington State Capitol Campus with Temple of Justice in foreground
This aerial view of the Washington State Capitol Campus shows the Temple of Justice in the foreground, with the Legislative Building behind it (Photo: Andrew Villeneuve/NPI)

A most­ly unit­ed Wash­ing­ton State Supreme Court ruled this morn­ing that the Leg­is­la­ture act­ed con­sti­tu­tion­al­ly two years ago when it levied a cap­i­tal gains tax on the wealthy to fund edu­ca­tion, cement­ing a his­toric vic­to­ry for pro­gres­sive rev­enue and a fair­er tax code in the Ever­green State.

The Court vot­ed 7–2 in favor of find­ing that Engrossed Sub­sti­tute Sen­ate Bill 5096 (the law that cre­at­ed the cap­i­tal gains tax) is indeed an excise tax. The major­i­ty opin­ion, authored by Asso­ciate Jus­tice Debra L. Stephens, also reject­ed the Quinn plain­tiffs’ oth­er argu­ments, affirm­ing the law’s con­sti­tu­tion­al­i­ty. It was signed by Chief Jus­tice Steven C. González and fel­low Asso­ciate Jus­tices Bar­bara A. Mad­sen, Susan Owens, Mary I. Yu, Raquel Mon­toya-Lewis, and G. Helen Whitener.

Jus­tices Sheryl Gor­don McCloud and Charles W. John­son dissented.

“The cap­i­tal gains tax is appro­pri­ate­ly char­ac­ter­ized as an excise because it is levied on the sale or exchange of cap­i­tal assets, not on cap­i­tal assets or gains them­selves,” the major­i­ty wrote. “This under­stand­ing of the tax is con­sis­tent with a long line of prece­dent rec­og­niz­ing excise tax­es as those levied on the exer­cise of rights asso­ci­at­ed with prop­er­ty own­er­ship, such as the pow­er to sell or exchange prop­er­ty, in con­trast to prop­er­ty tax­es levied on prop­er­ty itself.”

“Because the cap­i­tal gains tax is an excise tax under Wash­ing­ton law, it is not sub­ject to the uni­for­mi­ty and levy require­ments of arti­cle VII. We fur­ther hold the cap­i­tal gains tax is con­sis­tent with our state constitution’s priv­i­leges and immu­ni­ties clause and the fed­er­al dor­mant com­merce clause.”

“We there­fore reject Plain­tiffs’ facial chal­lenge to the cap­i­tal gains tax and remand to the tri­al court for fur­ther pro­ceed­ings con­sis­tent with this opinion.”

Dou­glas Coun­ty Supe­ri­or Court Judge Bri­an Huber, the tri­al court judge, had found in favor of the plain­tiffs last year, accept­ing their claims. How­ev­er, he’s now been reversed by the Wash­ing­ton State Supreme Court, which has the final say on inter­pret­ing the Con­sti­tu­tion as the high­est court in the land.

Here are sev­er­al high­lights from the ruling:

The Court cited ITEP’s analysis of Washington’s tax code

NPI, the Eco­nom­ic Oppor­tu­ni­ty Insti­tute, and the Wash­ing­ton Bud­get & Pol­i­cy Cen­ter often cite the Insti­tute on Tax­a­tion and Eco­nom­ic Pol­i­cy’s “Who Pays?” analy­sis when dis­cussing Wash­ing­ton’s upside down tax code in our pub­li­ca­tions. The Wash­ing­ton State Supreme Court did the same in its rul­ing today.

“The poor­est indi­vid­u­als bear the great­est tax bur­den due in large part to our heavy reliance on sales tax­es and the lack of a grad­u­at­ed income tax, with low wage earn­ers pay­ing near­ly six times more in state tax­es as a per­cent­age of per­son­al income than Washington’s wealth­i­est res­i­dents,” the major­i­ty not­ed. “This bur­den falls dis­pro­por­tion­ate­ly on Black, Indige­nous, and Peo­ple of Col­or (BIPOC), who are over­rep­re­sent­ed in low income brackets.”

The inclu­sion of this valu­able con­text con­cern­ing our tax code was a big win!

The Court made good use of Hugh Spitzer’s work

The Uni­ver­si­ty of Wash­ing­ton’s Hugh Spitzer, a dis­tin­guished pro­fes­sor of law who also serves as the Inter­im Asso­ciate Dean for Aca­d­e­m­ic Admin­is­tra­tion, has writ­ten exten­sive­ly about the his­to­ry of Wash­ing­ton’s tax code and the state’s repeat­ed efforts to levy an income tax. The major­i­ty relied on Spitzer’s research and analy­sis to help tell the sto­ry of how Wash­ing­ton end­ed up where it is today, specif­i­cal­ly A Wash­ing­ton State Income Tax — Again?, pub­lished in 1993.

The Court embraced our framing of Washington’s tax code

After recount­ing the 1920s and 1930s era devel­op­ments that yield­ed the regres­sive tax code Wash­ing­ton is still most­ly using today, the major­i­ty offered this wel­come assess­ment of our tax code: “Ours has been rec­og­nized as a unique­ly regres­sive tax sys­tem that “asks those mak­ing the least to pay the most as a per­cent­age of their income. […] The wealth­i­est house­holds in Wash­ing­ton are dis­pro­por­tion­ate­ly white, while the poor­est house­holds are disproportionately
BIPOC. As a result, Washington’s upside-down tax sys­tem per­pet­u­ates sys­temic racism by plac­ing a dis­pro­por­tion­ate tax bur­den on BIPOC residents.”

It was heart­en­ing to read these words.

Unlike the U.S. Supreme Court, our State Supreme Court is extreme­ly diverse. Sev­en of our nine jus­tices are women. Sev­er­al are women of col­or. We have a Native Amer­i­can female jus­tice, a Black female jus­tice, and an Asian female jus­tice. And our Chief Jus­tice is Lati­no. Hav­ing a court that looks like the state it rep­re­sents is a very good thing. It’s helped trans­form the insti­tu­tion into a more respon­sive judi­cial body that uses an equi­ty lens when delib­er­at­ing on cases.

The Court didn’t touch Culliton

The Cul­li­ton deci­sion, which has caused Wash­ing­ton a great deal of grief and trou­ble in the decades since it was hand­ed down, was not revis­it­ed because the Court deter­mined that ESSB 5096 was a con­sti­tu­tion­al excise tax.

“We hold the cap­i­tal gains tax is an excise tax under Wash­ing­ton law,” the major­i­ty wrote. “We decline to reex­am­ine Cul­li­ton because arti­cle VII’s uni­for­mi­ty and levy lim­i­ta­tions on prop­er­ty tax­es do not apply.”

The Court’s hold­ing vin­di­cates the strat­e­gy adopt­ed by the framers of ESSB 5096, who struc­tured it as an excise tax to max­i­mize its chances of being upheld.

Why the capital gains tax works as an excise tax

The Quinn plain­tiffs and the right wing oper­a­tives sup­port­ing them argued force­ful­ly that ESSB 5096 was an uncon­sti­tu­tion­al, ille­gal income tax.

The Court swept that argu­ment away today.

“A steady line of cas­es begin­ning with Cul­li­ton defines a ‘prop­er­ty tax’ as a tax on the mere own­er­ship of prop­er­ty, while an ‘excise tax’ applies to the exer­cise of rights in and to prop­er­ty or the exer­cise of a priv­i­lege. The cap­i­tal gains tax is an excise tax because tax­pay­ers do not owe the cap­i­tal gains tax mere­ly by virtue of own­ing cap­i­tal assets or cap­i­tal gains, like a prop­er­ty tax,” the major­i­ty wrote.

“Instead, the tax relates to the exer­cise of rights ‘in and to prop­er­ty’ — name­ly, the pow­er to sell or trans­fer cap­i­tal assets— like an excise.”

“And the ‘inci­dents’ of this tax do not make it a prop­er­ty tax, as the supe­ri­or court con­clud­ed, but rather con­firm that it is an excise.”

Elab­o­rat­ing, the major­i­ty added: “This court once remarked there is no ‘pre­cise line’ sep­a­rat­ing prop­er­ty and excise tax­es,” refer­ring to Mor­row v. Hen­neford.

“But over the course of decades, that line has sharp­ened. A sur­vey of our cas­es reveals we have artic­u­lat­ed and con­sis­tent­ly applied cer­tain key prin­ci­ples for dis­tin­guish­ing prop­er­ty tax­es from excise taxes.”

“Apply­ing those prin­ci­ples here, the cap­i­tal gains tax falls square­ly on the excise side of the line because it tax­es trans­ac­tions involv­ing cap­i­tal assets — not the assets them­selves or the income they generate.”

The Court said Huber used the wrong constitutional lens

Supe­ri­or Court Judge Bri­an Huber mis­ap­plied the Supreme Court’s prece­dents when he ruled for the plain­tiffs, the major­i­ty wrote.

“Rather than focus­ing on these ele­ments, the supe­ri­or court appears to have analo­gized between the cap­i­tal gains tax and the fed­er­al indi­vid­ual income tax, draw­ing com­par­isons between the two. This is the wrong con­sti­tu­tion­al lens.”

“Because the fed­er­al indi­vid­ual income tax is con­sid­ered an excise tax under fed­er­al law, com­par­ing var­i­ous facets of the fed­er­al income tax and the cap­i­tal gains tax does not sup­port char­ac­ter­iz­ing the cap­i­tal gains tax as a prop­er­ty tax under arti­cle VII,” the opin­ion went on to explain.

“To deter­mine whether a tax is a prop­er­ty tax with­in the mean­ing of the Wash­ing­ton Con­sti­tu­tion, we must look to Wash­ing­ton cas­es, which have artic­u­lat­ed clear prin­ci­ples for dis­tin­guish­ing prop­er­ty and excise tax­es. The supe­ri­or court erred in its appli­ca­tion of those prin­ci­ples here, instead iden­ti­fy­ing sev­er­al “hall­marks” that find lit­tle or no sup­port in our prece­dent delin­eat­ing quin­tes­sen­tial fea­tures of a prop­er­ty tax and that can be found in tax­es we have upheld as excises.”

The Court recognized the capital gains tax will help the state meet its paramount duty to educate Washington’s youth

Anoth­er great pas­sage in the major­i­ty opin­ion com­ments on the oth­er side of the equa­tion: the essen­tial pub­lic ser­vices that ben­e­fit from the cap­i­tal gains tax.

“We have pre­vi­ous­ly rec­og­nized that ‘the equal­iza­tion of the bur­dens of tax­a­tion’ is a “law­ful tax­ing pol­i­cy of the state.’ And the fund­ing of pub­lic edu­ca­tion is plain­ly a law­ful tax­ing pur­pose, indeed it is the State’s ‘para­mount duty.’ ”

“The legislature’s express pur­pose in enact­ing the cap­i­tal gains tax is to help meet the State’s para­mount duty to amply fund pub­lic edu­ca­tion and to make ‘mate­r­i­al progress toward rebal­anc­ing the state’s tax code.’ RCW 82.87.010.”

“Through tar­get­ed exemp­tions, this tax will gen­er­ate sub­stan­tial new rev­enue for pub­lic edu­ca­tion with­out exac­er­bat­ing exist­ing inequities as between indi­vid­u­als by requir­ing Washington’s wealth­i­est to pay a greater share of their over­all income in state tax­es. Plain­tiffs may dis­agree with the leg­isla­tive pol­i­cy behind the cap­i­tal gains tax, but they fall short of demon­strat­ing that pol­i­cy is unrea­son­able under arti­cle I, sec­tion 12,” the Court concluded.

Read the full ruling

If you’d like to read the rul­ing and the dis­sent from Sheryl Gor­don McCloud and Charles W. John­son, both opin­ions are avail­able below.

The Quinn opin­ions from the Wash­ing­ton State Supreme Court

NPI’s reaction

This morn­ing, on behalf of the NPI staff and board, I shared the fol­low­ing state­ment with the press and the public.

We have a final deci­sion: Wash­ing­ton’s cap­i­tal gains tax on the wealthy is constitutional! 

Our Supreme Court made it clear today that our elect­ed rep­re­sen­ta­tives and sen­a­tors cor­rect­ly fol­lowed our plan of gov­ern­ment two years ago when they took deci­sive action to bal­ance our upside down tax code and pro­vide sore­ly need­ed rev­enue for our under­fund­ed schools.

This rul­ing is a huge vic­to­ry for Wash­ing­ton’s kids. It sus­tains the his­toric law requir­ing the wealthy to begin step­ping up and invest­ing in Wash­ing­ton’s future, and foils a right wing attempt to give the rich a big tax break at the expense of mil­lions of Ever­green State families.

Thank you to Jus­tices Debra L. Stephens, Steven C. González, Bar­bara A. Mad­sen, Susan Owens, Mary I. Yu, Raquel Mon­toya-Lewis, and G. Helen Whiten­er for thought­ful­ly con­sid­er­ing all of the argu­ments and return­ing a sound rul­ing that empow­ers Wash­ing­ton to con­tin­ue on its jour­ney towards adopt­ing a fair­er, more just tax code that allows our essen­tial pub­lic ser­vices to be equi­tably funded.

And thank you to Attor­ney Gen­er­al Bob Fer­gu­son and Solic­i­tor Gen­er­al Noah Pur­cell for the excel­lent defense you led of Engrossed Sub­sti­tute Sen­ate Bill 5096. Our team at the North­west Pro­gres­sive Insti­tute deeply appre­ci­ates your ser­vice to the peo­ple of the State of Washington.

What a great day for the peo­ple of Wash­ing­ton and Wash­ing­ton’s future!

About the author

Andrew Villeneuve is the founder and executive director of the Northwest Progressive Institute, as well as the founder of NPI's sibling, the Northwest Progressive Foundation. He has worked to advance progressive causes for over two decades as a strategist, speaker, author, and organizer. Andrew is also a cybersecurity expert, a veteran facilitator, a delegate to the Washington State Democratic Central Committee, and a member of the Climate Reality Leadership Corps.

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3 replies on “VICTORY! Washington State Supreme Court upholds new capital gains tax on the wealthy”

  1. The courts major­i­ty con­tra­dicts com­mon sense and near­ly a cen­tu­ry of state law as well as the view of the IRS , which defines cap­i­tal gains as a form of income. This con­tra­dicts the state con­si­tu­tion­al law of 1933 that pro­hibits such income taxation.
    The state­ment that low­er income earn­ers bear a greater share of state income is an abd­solute lie, and pre­sent­ing this tax as a racial issue blames the many indi­vid­u­als who con­sis­tent­ly have vot­ed against state income tax­es are racist.
    The authors claim that 41 oither states tax cap­i­tal gains, but every one of them con­sid­ers the gains to be income.

    This will only be the first step as pro­gres­sives nev­er seem to have enough mon­ey for their projects. This will back­fire and high earn­ers will leave the state and take their busi­ness’s with them, much like Cal­i­for­nia that los­es 1000 peo­ple every day flee­ing high tax­a­tion. The bur­den that “falls dis­pro­por­tion­ate­ly to black, indige­nous and peo­ple of col­or are the jobs lost when job cre­ators leave the state.
    I doubt this web site will pub­lish my com­ments because it does­n’t fit their nar­ra­tive and free speech does­n’r exist anymore.

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