A Douglas County Judge ruled on Tuesday that the statewide capital gains tax, which progressive legislators passed last year, is unconstitutional. The ruling concerned two lawsuits that were consolidated into one—one by the conservative Freedom Foundation, the other by Republican former state attorney general Rob McKenna.
The decision marks a win for Washington’s ultra-wealthy, like Steve Gordon of Gordon Trucking and hedge fund manager Brian Heywood, who each contributed $20,000 to an initiative campaign to repeal the tax; former Starbucks CEO Howard Beher, contributed $5,000. Unsurprisingly, the Attorney General Bob Ferguson, a Democrat, said he would appeal the decision to the state Supreme Court.
Douglas County Superior Court Judge Brian Huber wrote in his ruling that the 7 percent tax on the sale of intangible financial assets, such as stocks and bonds, violates Washington’s constitution’s “uniformity clause” because it imposes “zero tax on capital gains below that $250,000 threshold.” The uniformity clause prohibits the state from taxing different property at different rates.
Democrats have argued that the tax is constitutional because it doesn’t assess property, but rather, the sale of property, making it an excise tax, not an income tax. Huber rejected that argument, saying the plaintiffs “properly characterized [the capital gains tax] as an income tax” in their lawsuit. And since Washington considers income to be a form of property, any income tax would need to meet the state constitution’s uniformity clause.
Washington is one of the few state’s in the country without an income tax. The state instead relies heavily on business and sales taxes to generate revenue. Democratic lawmakers have frequently criticized this model as regressive, because it means that people who earn less pay a larger percentage of their income in taxes than wealthy people pay. Democrats saw the capital gains tax as a way to reverse this regressive .
Following the judge’s decision, State Attorney General Bob Ferguson said if the tax were ultimately struck down, the state could lose hundreds of millions in funding for childcare programs, early learning, and school construction projects. “Consequently, we will continue defending this law enacted by the peoples’ representatives in the legislature. All the parties recognize this case will ultimately be decided by the State Supreme Court. We respectfully disagree with this ruling, and we will appeal.”