So, the capital-gains tax rushed into law this spring is facing a second day in court. No surprise.
Perhaps that’s to be expected when Democratic lawmakers jam a new tax into the code, on largely party-line votes during a supposedly streamlined remote session. Then try to bulletproof it against voter backlash by cynically misusing an emergency clause, intended for, well, emergencies.
It’s little comfort that House Democrats eventually replaced that explicit clause with subtler language that they believe could block a voter referendum to repeal this high-earners income tax.
And they did so as the bipartisan Tax Structure Work Group, which has been studying comprehensive tax reform since 2019, prepared for a summer gathering public input about alternate tax structures, to be followed by town hall meetings in the fall.
As widely expected, the move provoked not one but two lawsuits, including one represented by Washington’s former Attorney General Rob McKenna.
McKenna argues in the suit, filed in Douglas County Superior Court, that the new tax is a thinly disguised unconstitutional income tax. He filed the 17-page complaint on behalf of a small group of business owners, farmers and the Washington State Farm Bureau. In it, he also notes that the Internal Revenue Service and every other state revenue department in the country define capital gains as income. He further reminded the court that Washington voters have turned down 10 opportunities to allow an income tax through initiatives and referendums over the years.
But even if the court buys legislators’ definition, the tax still would be illegal because it would apply to some out-of-state transactions, excluding physical assets, McKenna argues. A Freedom Foundation attorney made a similar argument in a lawsuit filed last month in the same county, even before Gov. Jay Inslee signed the legislation into law. A judge will decide whether the tax is unconstitutional or illegal.
Any new tax will generate some pushback, but Washingtonians have a right to be riled by this outrage. In their rush to cross this item off their wish list, state Democrats failed to make their case. The capital-gains tax doesn’t balance the tax code; it just adds another layer. With strong revenue projections and operating budgets already leaping — up to around $59 billion in 2021-23 from $32 billion just a decade ago — it’s difficult to justify a brand new tax.
There’s a reason the gears of democracy usually grind slowly. Deliberation not only gives the public a chance to weigh in, it helps lawmakers avoid mistakes.