U.S. Supreme Court Declines Washington State Capital Gains Tax Case

(The Marketplace) – On Tuesday morning, the Washington State Supreme Court’s March 2023 decision to uphold the legitimacy of the state’s capital gains tax was denied by the U.S. Supreme Court.

As usual, the justices did not explain their decision to decline the case.

The tax, which levies a 7% tax on long-term capital gains over $250,000 for individuals, was opposed because it effectively functions as an income tax and goes against the state constitution’s stringent income tax laws.

Because the tax applies to sales or transfers of assets, supporters argue it is an excise tax on a good or service rather than an income or property tax as opponents say.

The state’s courts decided in a 7-2 ruling that the levy was an excise tax rather than a property tax, which the state constitution only permits to be levied once a year. The court also rejected the argument that it was an income tax, which has been invalidated by state Supreme Court rulings dating back to the 1930s because the uniformity clause of the state Constitution forbids differing rates of income taxation.

Opponents changed course and appealed the ruling to the highest court in the country, arguing that the capital gains tax violates the commerce clause of the US Constitution when it comes to earnings obtained from purchases made outside of Washington.

U.S. Supreme Court Declines Washington State Capital Gains Tax Case (1)

The capital gains tax, which was implemented in 2022, generated revenue of around $900 million in the previous year, significantly more than anticipated.

Tax supporters applauded the U.S. Supreme Court’s ruling.

Treasure Mackley, executive director of Invest in Washington Now, stated in a news release that “the U.S. Supreme Court’s decision today was a huge victory for Washington kids and families.” “It preserved $900 million annually—much more than was first anticipated to be raised from this tax—to fund Washington’s child care and education initiatives. Given the financial shortages that school districts throughout the state are experiencing, this decision could not have come at a more crucial moment.

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Executive Director of the Washington State Budget & Policy Center Misha Werschkul responded similarly.

“The United States Supreme Court’s decision to not hear oral arguments for Quinn v. Washington is fantastic news for Washington state and our nation,” the spokesperson stated in a news release. “This case was a cynical attempt to overturn a modest tax that only affected the 0.2% of Washington taxpayers who are the wealthiest.”

The capital gains excise tax brought in around $1 billion in 2023 alone to fund improvements in early childhood education, child care, and schools. The overwhelming 7-2 decision of the Washington State Supreme Court upholding the tax’s constitutionality is upheld by today’s order.

Northwest Progressive Institute founder and executive director Andrew Villeneuve praised the ruling as a victory for Washingtonians.

“The events of the last three years have vindicated the Legislature’s work to balance Washington’s tax code by levying a capital gains tax on the wealthy,” he said in an email to The Center Square.

Thankfully, the tax is raising more money than anticipated for childcare, early learning, and education—defying the predictions of those who believed it wouldn’t succeed. In a historic ruling, the Washington State Supreme Court upheld its legitimacy and constitutionality. And the United States Supreme Court has now upheld that decision.”

The tax’s opponents accepted the setback with grace.

Michael Gallagher, president and CEO of the Washington Policy Center, stated in a news release, “We always knew the odds were long, but we remain disappointed the U.S. Supreme Court did not take the opportunity to correct the flawed direction of our state.”

The good news is that more than 400,000 Washingtonians have already witnessed the harm this tax has caused and have spoken up to their fellow citizens, he continued.

The cornerstone of Washington State’s economic performance over the past 100 years is the same as that of the state constitution: maintaining our state income tax at zero dollars protects our economic growth, jobs, and family-friendly possibilities. Sending our investors and inventors to Texas and Florida is the last thing we should do.

Let’s Go Washington, a voter advocacy group, submitted approximately 420,000 signatures for Initiative 2109 to the legislature in December. The capital gains tax would be eliminated by the proposal. The group also submitted about 438,000 signatures in support of Initiative 2111, which forbids income taxes in cities and counties.

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