(The Center Square) – The Washington Policy Center and the Citizen Action Defense Fund on Monday filed individual amicus briefs urging the U.S. Supreme Court to review the constitutionality of Washington’s capital gains tax. The state Supreme Court earlier this year, in the case of Quinn v. State of Washington, upheld the constitutionality of the tax.
The state Legislature passed the capital gains tax in 2021, and Gov. Jay Inslee signed it into law. It creates a 7% tax on profits of more than $250,000 from the sale of some assets, such as stocks and bonds.
Proponents contend the capital gains tax is an excise tax on a good or service and not an income or property tax, as opponents claim, because it applies to sales or transfers of assets.
Justice Debra Stephens sided with supporters in writing the court’s majority opinion in the Quinn decision.
“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,” she 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.”
Opponents decried the ruling by Washington’s highest court as one of tortured reasoning that could open the door to future state income taxes.
Both amicus briefs mention the hazards of allowing a state to implement an excise tax outside its borders.
“A healthy system of interstate competition cannot function if states overstep their boundaries,” the amicus brief from WPC, Opportunity for All and several other public policy organizations, reads. “Without question, states have wide latitude to craft economic regulations, pursue differing market policies, and establish varying tax structures that, in their view, best attract business and talent from the rest of the country to their state. But in exercising their prerogative to structure their tax system as they see fit, states must respect the territorial limits on their power and not encroach on the sovereign domain of other states.”
The brief goes on to warn, “And a rule that a state’s power to impose excise taxes attaches to out-of-state transactions and out-of-state property solely by virtue of the residency of the taxpayer could soon give rise to states’ efforts to regulate the out-of-state conduct of their residents – further eroding the core territoriality constraints on state authority.”
CADF’s amicus brief, joined by some of the most influential business associations in the state, notes that “the inconsistent treatment of capital gains between Washington, on the one hand, and every other state and the federal government, on the other, will significantly complicate tax compliance, causing no shortage of problems for Washington taxpayers – and especially taxpayers with multiple residences or who move between states.”
The brief also outlines the legal and practical difficulties of the capital gains tax, including the risk of double taxation and the operational hindrances faced by businesses attempting to comply with the tax.
“The Capital Gains Tax is not just bad law – it’s bad policy for businesses and workers,” said CADF Executive Director Jackson Maynard in a news release. “Washington lawmakers have once again found a way to disadvantage Washington-based residents and job creators, this time with a tax scheme that inflicts an additional burden for those choosing to live in our state. This tax is not imposed on the same transactions for residents outside of the state, making it both practically and legally defective.”
