Supreme Court hears arguments on Washington capital gains tax

The Washington Supreme Court is deciding the future of the capital gains tax targeting the wealthy that legislators enacted in 2021.

A lower court found it unconstitutional because it doesn’t apply equally to everyone.

Justices heard arguments on the tax Thursday.

Supporters say the capital gains tax helps re-balance the state’s tax code by targeting the richest residents to raise $500 million per year for schools and early learning.

The 7% tax applies to capital gains of more than $250,000 per year.

Retirement accounts and sales of homes, farms, and small businesses are exempted.

Supporters estimate about 7,000 households in the state will pay it, including Sharon Chen’s family.

She spoke at a rally in Olympia in support of the tax.

“We have a responsibility to pay this tax and I’m so excited to see a state where we have the resources that are a result of this tax,” Chen said.

Not all taxpayers are so enthusiastic, and one group sued.

Part of the argument before the Supreme Court focused on what triggers the tax.

Opponents say it applies to any investment income, while supporters say it is only tied to the sale of stocks and bonds.

“You can own limitless stocks or bonds in any given year without owing this tax, it’s only if you sell them,” Washington Solicitor General Noah Purcell told the justices.

“The capital gains tax is not an excise tax, it’s an income tax,” said Rob McKenna, the former attorney general who is representing opponents of the tax. “Every taxing authority in our nation, from the IRS on down, treats taxes on capital gains as income taxes, because capital gains are income.”

State voters have repeatedly rejected an income tax.

Jason Mercier of the Washington Policy Center, which opposes the capital gains tax, says there aren’t enough votes in the legislature for a constitutional amendment to allow an income tax.

“It’s basically the third rail of politics in Washington, having 10 rejections is basically an indication of where the electorate is on that,” Mercier said.