by Leo Brine
On Wednesday, a conservative think tank, the Freedom Foundation, filed a lawsuit against the hot-off-the-presses capital gains tax (SB 5096) and another conservative group announced they plan to do so as well.
In response, Democratic state Sen. Jamie Pedersen (D-43, Seattle) told PubliCola later Wednesday evening: Bring it on. Lawsuits are “great,” said Pedersen, who chairs the Law and Justice committee, because he sees them as a way to challenge old, anti-tax state supreme court rulings.
During this year’s legislative session, as the Democrats moved the capital gains tax bill through the legislature, Republicans decried it as an unconstitutional income tax. This is now the legal argument against the bill, which Governor Jay Inslee has not yet signed into law.
If the modern-day supreme court was to determine that income is not property, Sen. Pedersen said, it “would change the world for us in Olympia about what’s possible.”
The capital gains tax, which Democrats passed on the last day of this year’s legislative session on a 25-24 vote, with three moderate Democrats and every Republican voting no, imposes a 7 percent tax on financial gains from the sale of intangible financial assets, such as stocks and bonds, above $250,000. About 7,000 Washington taxpayers would pay the tax beginning in 2023.
The Freedom Foundation filed its lawsuit in Douglas County on behalf of seven state residents who would pay the tax. The group claims that capital gains constitute income, making the tax an income tax. In 1933, the state supreme court ruled that income is property subject to the uniformity clause in the state constitution, which says that different types of property—such as income below and above a certain threshold—can’t be taxed at different rates. This ruling has been the basis of claims that an income tax is unconstitutional for nearly a century.
Democrats say the capital gains tax is an excise tax because it’s the sale of assets that triggers the tax rather than the income that the sale generates.
Conservatives don’t buy it. “Capital gains are clearly income. And when you tax them, it’s an income tax — no matter what you choose to call it,” Freedom Foundation CEO Aaron With said in a press release.
The group also says the tax violates the Commerce Clause of the United States constitution because the tax would be imposed on sales of out-of-state assets, which, the Freedom Foundation argues, the legislature does not have the right to do.
Sen. Jamie Pedersen (D-43, Seattle) said he welcomes the lawsuits and sees them as an opportunity “to test whether decades old rulings that the [Supreme Court] made are still where the court is.”
No one is surprised by the lawsuits. During the session, Republicans signaled that legal challenges would be forthcoming, and the going theory was that Democrats were itching for the fight.
Pedersen said he sees the lawsuits as an opportunity “to test whether decades-old rulings that the [Supreme Court] made are still where the court is.” If the modern-day supreme court was to determine that income is not property, Pedersen said, it “would change the world for us in Olympia about what’s possible.”
The Opportunity For All Coalition (OFAC) also announced Wednesday they plan to file a suit against the tax later this week. Both the Freedom Foundation and the OFAC have a track record of blocking progressive tax proposals. In 2017, the Freedom Foundation and OFAC successful killed Seattle’s proposed high-earners income tax.