First lawsuit filed against capital-gains tax passed by Washington lawmakers

OLYMPIA — Washington’s new tax on capital gains above $250,000 isn’t even law yet, but it’s already being challenged in the courts.

Supporters and opponents of the tax have long known the policy would become grist for a legal challenge that could potentially go up to the state Supreme Court.

That clash kicked off on Wednesday, with the conservative group Freedom Foundation, working in conjunction with a Seattle law firm, filing suit on behalf of seven state residents in Douglas County Superior Court. The suit was filed against the state of Washington, as well as the state Department of Revenue and its director, Vikki Smith.

It comes in response to Senate Bill 5096, which creates a 7% tax on the capital gains of the sale of assets — such as stocks and bonds — above $250,000.

The bill passed the Legislature on Sunday, the final day of this year’s 105-day session. The law would begin to take effect January 2022, with the first state tax returns due in 2023, according to an analysis of the bill.

The lawsuit filed Wednesday contends that, among other things, the new bill imposes a tax on income, and thus violates the state constitution’s that taxes must be applied uniformly across the same class of property.

In a statement, Freedom Foundation CEO Aaron Withe said, “Capital gains are clearly income.”

“And when you tax them, it’s an income tax — no matter what you choose to call it,” he added.

A second group has also announced an impending legal challenge against the new tax.

“The Opportunity for All Coalition (OFAC) plans to file a lawsuit against the recently passed statewide capital gains tax — which looks a lot like a state income tax,” wrote OFAC President Collin Hathaway on that group’s website.

The bill exempts a range of assets, such as retirement accounts, sales of real estate, timber, livestock and some agricultural property. Additionally, it exempts sales of sole proprietor businesses, provided they have a gross revenue of up to $6 million. The sale of some auto dealerships is also exempted.

It is estimated that the version of the tax that passed would raise about $445 million annually, beginning in fiscal year 2023. The revenue would be put into the state’s Education Legacy Trust Account to be used for early learning and child care programs.

Gov. Jay Inslee said he was “confident” the courts would uphold the policy, which Democrats have said they structured as an excise tax, rather than an income tax.

“Yes, I am confident that it is constitutional,” said Inslee in an interview Wednesday. He described the bill as a policy “that will simply bring some modicum of fairness” to Washington’s tax system.