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.

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!