Lawsuit Filed To Prevent Washington's New Capital Gains Tax

OLYMPIA, WA — A lawsuit has been filed in Douglas County Superior Court in an attempt to halt Washington's recently-passed capital gains tax.

The lawsuit, filed by conservative non-profit the Freedom Foundation, argues the capital gains tax is a form of income tax, making it illegal under the state's constitution.

“How many times do we have to go down this road?” said Freedom Foundation CEO Aaron Withe in a news release announce the suit. “Capital gains are clearly income. And when you tax them, it’s an income tax — no matter what you choose to call it.”

State lawmakers who supported the tax disagree. They call it an "excise tax on gains" which they believe makes it legally distinct from an income tax.

“This important step to rebuild our unfair tax code was taken after years of work, years of dialogue, and thousands of voices calling for this policy,” said bill sponsor Sen. June Robinson (D-Everett).

Even lawmakers who support the tax have said they expected the bill to end up sparking a lawsuit. Last year, Washington's Supreme Court struck down Seattle's attempt to impose a 2.25 percent income tax on high-earning households. Only time will tell if the courts agree that the capital gains tax is an income tax or not.

If implemented as passed, Senate Bill 5096 will create 7 percent tax on all capital gains — like the sales of stocks, bonds and other high-value assets — above $250,000 a year. The bill provides several exceptions for gains like real estate and retirement accounts, enough lawmakers estimate only around 7,000 Washingtonians, or 0.2 percent of taxpayers, will ultimately end up paying the tax if it goes into effect.

The Freedom Foundation argues the tax should've been sent to voters for approval, arguing that a last-minute emergency clause inserted to prevent a referendum on the tax was an attempt by Democrats to wrestle the issue away from the people.

“If Inslee and his fellow progressives are so convinced this is the right thing to do, why are they so determined to rob voters of the chance to weigh in on the matter?” said Withe.

In 2010, Washington voters shot down a proposed income tax on households making more than $400,000 annually, with 64.15 percent of voters opposing the tax, per Ballotpedia.

If the bill can hurdle the legal challenge, the new tax will go into effect Jan. 1, 2022 with the first payments due April 17, 2023.