For now, the future of Washington’s capital gains tax is in the hands of state courts.
When July 8 passed last week, the deadline for filing signatures on more than three dozen ballot measures opposing the new tax also passed. None of the measures had enough signatures to qualify for the November ballot.
“No one came (Friday) to file anything regarding the capital gains measures,” said Charlie Boisner, director of communications for the Washington secretary of state. The issue, he said, will not be addressed by voters this year.
But the future of the tax targeting large stock sales for Washington state residents — approved by both the state legislature and the governor in 2021 — remains uncertain. After Governor Jay Inslee signed the measure, his opponents successfully blocked it in Douglas County Court.
Douglas County Superior Court Judge Brian Huber sided with opponents of the new tax who argued it was an illegal income tax under the constitution of the state.
Attorney General Bob Ferguson then appealed the decision directly to the state Supreme Court. The state’s highest court has yet to say whether it will bypass the lower appeals court and take up the case.
“We haven’t heard yet,” said Brionna Aho, the attorney general’s director of communications.
Political consultant Sandeep Kaushik, writing for Alley of posts Tuesday, said the failure of one of the campaign measures to repeal the law (Initiative 1929) may be “the most significant and consequential political development in Washington state this year.”
“Capital gains opponents, drawn from the ranks of the very wealthy and the venture capital community, have spent more than a year laying the groundwork for a repeal initiative that never eventually garnered a single signature,” Kaushik wrote.
The statewide capital gains tax imposed a 7% excise tax on the sale of stocks, bonds and businesses – the first such tax in the US. state history.
The excise tax was not universally popular in the tech community, as it was intended to target and tax a common form of industry compensation: stocks and stock options.
But the tax would only apply to capital gains over $250,000. And it would exempt many other potential capital gains, including land and real estate structures; retirement accounts; cattle for agriculture or breeding; and the sale of timber and timber land, among other exceptions.
The central question for the court: is capital gains tax an income tax or a sales tax? Proponents of the tax have said it is not an income tax, but rather an excise or sales tax that is only levied when a sufficient amount of stock is sold.
In almost all states – and within the IRS – capital gains are classified as income. But Washington is an outlier for a legal reason: It’s the only state in the country that classifies income as real estate. This has thwarted any attempt to approve any form of income tax, as all income taxes are therefore subject to the strict constitutional restrictions on property taxes.
There are no such restrictions on sales or excise taxes.