A Washington judge has ruled the state’s new capital gains tax violates the constitution.
Under the statewide policy, the sale of stocks, bonds and businesses are subject to a 7% excise tax. The bill was approved by the legislature and signed by Governor Jay Inslee.
The Douglas County Superior Court ruled on March 1 that SB 5096 is an unconstitutional graduated income tax.
Judge Brian Huber wrote in his decision that the Washington Supreme Court had previously ruled in 1993 in favor of a uniform 1% taxation on property.
“The State characterizes the new tax statute as a ‘tax that applies on the sale or transfer of property’ and argues that such taxes are excise taxes,” Huber wrote. “But as noted above, the new tax is not levied upon ‘the sale or transfer’ of capital assets. Instead, the new tax statute levies a tax on receipt, and thus ownership, of capital gains.”
Huber also wrote that like “an income tax and unlike an excise tax, the new tax statute includes a deduction for certain charitable donations the taxpayer has made during the tax year.”
On April 1, Attorney General Bob Ferguson made a direct appeal to the state’s Supreme Court.
“The excise tax wasn’t universally popular in the tech community because it sought to ultimately tax a common form of the industry’s compensation: stocks and stock options,” reports GeekWire. “But the tax would have narrowly applied only to capital gains of more than $250,000. And it would exempt a laundry list of other potential capital gains including real estate land and structures; retirement accounts; livestock for farming or ranching; and the sale of timber and timberlands, among other exceptions.”
Taxpayers who make over $250,000 are permitted to deduct up to $100,000 a year from their capital gains.
Early estimates suggest the capital gains tax would have generated $415 million in 2023 when the law goes into effect.
It is unclear if the Court will take up the case.