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
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!