State files motion asking judge to throw out lawsuits against capital gains tax

Attorney General Bob Ferguson, left, speaks as Washington Gov. Jay Inslee, center, and Solicitor General Noah Purcell look on. (AP file Photo/Elaine Thompson)

Washington Attorney General Bob Ferguson filed a motion Tuesday, calling on a Douglas County Superior Court judge to dismiss a pair of lawsuits filed against the state’s recently-passed capital gains tax.

Court battle over capital gains tax could rewrite state’s tax code

The first of the two lawsuits was filed by the Freedom Foundation three days after the tax was approved by state lawmakers, while the second one — which includes former Attorney General Rob McKenna and the Washington Farm Bureau as plaintiffs alongside several others — was filed less than a month later.

The bill levies a 7% tax on capital gains above $250,000 to bring in an estimated $415 million in 2023, its first year. The text of the bill describes it as an excise tax on the sale of stocks, bonds, and other assets above $250,000, excepting real estate and family-owned small businesses.

Both lawsuit asks the court to void the tax, declare the bill unconstitutional, prevent its implementation while the lawsuit plays out, and have the state pay the plaintiffs’ legal fees.

A graduated income tax has been illegal in Washington since a landmark 1936 case, in which the state Supreme Court ruled that the state constitution required all property to be taxed at the same rate. The court said income counted as property, striking down a graduated income tax rate approved by voters.

Attorney General Ferguson’s Tuesday filing challenges the legitimacy of the two lawsuits on a few fronts. First and foremost, he asserts that the lawsuits represent a matter of political disagreement, rather than a standard legal challenge. Given that, Ferguson argues that plaintiffs would suffer “no legal harm from the tax they challenge, and they ask this Court to issue a purely advisory political opinion.”

Washington Rep: Capital gains tax is just ‘parity in the tax code’

Second, he points out that because the tax doesn’t take effect until 2022 — and wouldn’t actually be due until the following year — there’s no way for plaintiffs to know whether they will actually be directly affected in any way.

“None of the Plaintiffs, nor any other person, will be required to pay the tax until nearly two years from now,” the filing reads. “And no one can possibly know today what capital gains they will have in 2022.”

Ferguson further argues that “a very small percentage of Washingtonians” would likely be subject to the tax thanks to several exceptions carved into the bill, offering the following example:

Imagine a Washington taxpayer who in a single year sells a large rental property at a $1 million profit, sells a small business at a $1 million profit, sells assets in a retirement account at a $1 million profit, and sells ordinary stocks held outside a retirement account at a $200,000 profit. Though the person would have earned over $3 million in capital gains from these sale transactions, they would owe no Washington capital gains tax because the first three asset categories are exempt and the $250,000 standard deduction exceeds the profit from non-exempt assets.

It will next be up to the Douglas County judge overseeing both cases to determine whether the state’s filing presents sufficient evidence to overturn the lawsuits. In past court cases in Washington, judges have consistently struck down graduated income taxes as unconstitutional, making it crucial for plaintiffs to prove that there’s little to no distinction between that and the proposed capital gains tax.

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