SEATTLE (AP) — An attempt to balance what is considered the nation’s most regressive state tax code will face the Washington Supreme Court Thursday in a case that could overturn a 1930s income tax ban.
Washington is one of only nine states with no income tax, and its heavy reliance on sales and fuel taxes to pay for schools, roads, and other public expenses falls disproportionately on low-income residents.
Lawmakers say they pay at least six times as much in taxes as a percentage of household income than the wealthiest residents, while middle-income residents pay two to four times as much.
Democrats in Olympia, led by Gov. Jay Inslee, were looking to start addressing the issue in 2021 when they introduced a 7 percent capital gains tax on the sale of stocks, bonds and other high-end assets with tax exemptions on the first $250,000 a year. and for income from the sale of retirement accounts, real estate, and certain small businesses.
It was expected to be paid by 7,000 people — less than 1 in every 1,000 residents — and would bring in about half a billion dollars a year to pay for public education in Washington starting this year. But he’s facing legal challenges from wealthy residents, business and agricultural organizations who say he violates the state and federal constitutions and promotes bad politics to boot.
“Washington’s unique, unprecedented, and unconstitutional capital gains tax will discourage our state’s resident entrepreneurs and investors from investing in new and expanding businesses in our state,” the Washington Building Industry Association and the Washington Retail Association wrote in a friend. summary of the trial. “It will also force a significant number of individual business owners to leave Washington to avoid the new tax.”
Among the key questions before judges on Thursday is whether the new tax, as the state insists, is an excise tax — broadly defined as a tax on certain goods, services, or activities — or an income tax, which the court has long ruled unconstitutional. in Washington.
In 1932, voters overwhelmingly passed a graduated income tax. But the following year, the state Supreme Court overturned it in a 5–4 decision, ruling that income tax is a property tax, and the state constitution states that property taxes should be evenly distributed and capped at 1% per year.
Last year, Douglas County Superior Court Judge Brian Huber in central Washington sided with those who challenged the capital gains tax as a prohibited income tax. State Attorney General Bob Ferguson filed an appeal, saying Huber was wrong because the tax isn’t on property, but on what the owner does with that property by selling it.
In another report by a friend of the court, the Edmonds School District and the Washington Education Association said they agreed with the state that the capital gains tax is an excise tax. But, they say, if the judges disagree and decide it’s an income tax, then they should reverse their nearly century-long view that income tax is a property tax.
Unlike property, income is not something that is owned and can be sold, their lawyers wrote: “The cases of this court that income tax is a tax on property were wrong when the decision was made, and they are wrong. now”.
The arguments come as progressives in several states push for the rich to pay more taxes. Bills announced this month in California, New York, Illinois, Hawaii, Maryland, Minnesota, Washington and Connecticut revolve around the idea that the richest Americans should pay more. But all proposals have dubious prospects.
Those who dispute the Washington capital gains tax say it can apply even if the taxpayer takes no action to earn their profits — in other words, they are taxed because they own the asset, not because they took any action against him.
For example, a Washington resident who owns shares in an out-of-state company could benefit if the board of directors decides to sell the underlying assets, with income transferred to shareholders, they write. In such a case, the tax would be levied not based on where the business took place, but on where the shareholder resides, with implications for interstate commerce under the US Constitution, they argued.
They say the government’s description of the measure as an excise tax is simply a political maneuver to hide its true nature. They claim that in 41 states capital gains tax is taxed as income.
Seven states have no income tax at all—Washington, Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming—and two others, New Hampshire and Tennessee, tax only dividends and interest income received by individual taxpayers.
The challengers noted that since the 1930s, Washington voters have rejected 10 times constitutional amendments or initiative measures that would allow or introduce an income tax.
“Whether the current tax system is desirable or should be changed is the quintessence of economic policy, not suitable for adjudication,” they wrote.