The state of Washington may not see how its hotly contested capital gains tax scheme violates the U.S. Constitution, but a virtual Who’s Who of public policy luminaries from across the country beg to differ.
In October, the Freedom Foundation – a national watchdog group promoting free markets and limited, accountable government – filed an appeal to the U.S. Supreme Court of a lawsuit it brought when the tax was passed by the Washington State Legislature and signed into law by Gov. Jay Inslee in 2021.
This week, a pair of amicus briefs supported by at least 16 different organizations was filed with the court backing the Freedom Foundation’s action.
The briefs, drafted by the Citizen Action Defense Fund and the Washington Policy Center, included amicus support from:
- The Association of Washington Business;
- The National Federation of Independent Business Small Business Legal Center, Inc.;
- Washington Trucking Associations;
- The Ethnic Chamber of Commerce Coalition;
- The Opportunity for All Coalition;
- Americans for Tax Reform;
- The California Policy Center;
- The Grassroots Institute of Hawaii;
- The Illinois Policy Institute;
- The Independence Institute:
- The National Taxpayers Union Foundation;
- The Manhattan Institute;
- The Mountain States Policy Center;
- The Oklahoma State Chamber Research Foundation;
- The Reason Foundation: and,
- The Tax Foundation.
The Freedom Foundation’s original lawsuit was based on a provision in Washington’s state constitution that unequivocally requires property taxes to be imposed at the same rate for everyone paying them. The state’s new capital gains tax, however, imposes a 7 percent tax on income from capital gains above $250,000 a year, such as profits from stocks or business sales.
Washington case law for more than 100 years has agreed that income is property, thus a tax on capital gains that treats high earners differently is clearly a violation of the state constitution.
A Superior Court judge agreed with the Freedom Foundation, but his ruling was overturned in 2022 by the reliably liberal Washington State Supreme Court, which agreed with the state’s characterization of the assessment as an excise tax on the capital gains transaction itself rather than the income produced by the sale.
In its appeal to the U.S. Supreme Court, the Freedom Foundation contends the capital gains tax violates the Commerce Clause of the U.S. Constitution, which reserves to Congress the right to regulate interstate commerce, thus depriving states of the ability to do so.
As structured, the tax applies not to the sale of capital assets in Washington state but to the sale of capital assets by Washington residents. Consequently, Washington’s tax could apply to the sale of capital assets held in other states by Washington residents, and the sale could also be taxed by the state in which the sale takes place.
If the Supreme Court decides to accept the case and concludes that the tax violates the Commerce Clause, it could strike down the entirety of the tax and potentially open the door for the refund of taxes previously paid.
“In their haste to ignore the state Constitution and the will of the people, Washington’s lawmakers – with an assist from the state Supreme Court – have imposed a tax that also violates the U.S. Constitution,” said Freedom Foundation Chief Litigation Counsel Eric Stahlfeld. “We’re grateful to have the support of so many respected organizations for our appeal, and we’re confident the obvious federal issues involved will condemn this illegal tax to the death it has always deserved.”
