TUMWATER, Thurston County — A critical battle in the legal struggle over the state’s capital gains tax was fought Thursday in a nondescript Tumwater courtroom, as lawyers defending and opposing the tax made their cases before the Washington Supreme Court.
The new tax, which the state is slated to start collecting in February, applies to profits of more than $250,000 when a person sells certain assets, such as stocks or bonds.
Lawyers spoke and fielded questions from the nine justices for about an hour Thursday morning, in the Supreme Court’s temporary quarters in Tumwater, just south of Olympia.
The arguments highlighted the parties’ disagreement over what type of tax the capital gains tax amounts to and whether it is in accord with the state constitution.
Opponents have argued the capital gains tax is an income tax barred by the state constitution.
Solicitor General Noah Purcell argued on behalf of the state Thursday that the capital gains tax is an excise tax, which is a tax on a specific good or service.
“The key thing is that there is a transaction or transfer that’s being taxed, and that’s what makes it an excise tax so clearly under this court’s case law,” Purcell said. The capital gains tax exempts real estate and assets in retirement accounts.
Lawyer Paul Lawrence, representing the Edmonds School District and the Washington Education Association, which both intervened in the case in favor of the capital gains tax, also argued it should be considered an excise tax.
But Lawrence added that if the Supreme Court decided the capital gains tax is an income tax, it should overturn previous court decisions treating income taxes as taxes on property, and “provide again the inherent powers that the Legislature has to make taxing decisions that are fair and equitable.”
Callie Castillo, a lawyer for the parties opposing the tax, described the capital gains tax as a “nonuniform” property tax on income and said it violates both the state and U.S. constitutions.
“There’s a circular problem here in that this tax cannot stand either under the state constitution or the federal constitution, no matter what type this court ultimately decides,” Castillo said.
The tax faced its first legal challenge just days after its passage in April 2021 from the Freedom Foundation, which was later combined with a second lawsuit.
Although the tax’s future is up in the air, the state will start to collect the tax in February, with bills coming due April 17. If the court finds the tax unconstitutional, the revenue department says it will refund tax payments with interest.
Oral arguments over the capital gains tax case come as the Legislature is just a few weeks into the 2023 session and introducing new tax policies. Last week, state lawmakers introduced a tax on wealth, and a margin tax to replace the state’s business and occupation tax.
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