January 31, 2023

BY GENE JOHNSON
Associated Press

SEATTLE (AP) — An attempt to overturn what is considered the nation’s most regressive tax law comes before the Washington Supreme Court Thursday, in a case that could overturn an income tax ban dating back to the 1930s.

Washington is one of nine states with no income tax, and its heavy reliance on sales and fuel taxes to pay for schools, roads and other public spending disproportionately affects low-income residents.

According to lawmakers, as a percentage of household income, they pay at least six times more in taxes than the wealthiest residents, and middle-income residents pay two to four times as much.

Democrats in Olympia, led by Gov. Jay Inslee, attempted to address this in 2021 when they introduced a 7% capital gains tax on sales of stocks, bonds and other high-value assets, with exemptions for the first $250,000 per year and for profits from the sale of retirement accounts, real estate, and certain small businesses.

It was expected to be paid for by 7,000 people — less than 1 in 1,000 residents — and raising nearly half a billion dollars a year as of this year to help fund public education in Washington. But it faces a legal challenge from wealthy residents, as well as business and farming organizations, who say it violates state and federal constitutions and makes for bad politics on top of that.

“Washington’s unique, unprecedented and unconstitutional capital gains tax will discourage our state’s resident entrepreneurs and investors from investing in new and expanding businesses in our state,” the Building Industry Association of Washington and the Washington Retail Association wrote in a friend of the USA. dish short. “It will also result in a significant number of individual business owners leaving Washington to avoid the new tax.”

Among the key questions to be discussed before the judges on Thursday is whether the new tax, as the state emphasizes, is an excise tax — broadly defined as a tax on certain goods, services or activities — or an income tax, which the court long ago ruled Time posed has been held in Washington to be unconstitutional.

Voters overwhelmingly passed a graduated income tax in 1932. But in a 5-4 decision the following year, the state Supreme Court overturned it, ruling that an income tax was a property tax — and the state constitution says property taxes must be uniform and capped at 1% per year.

Last year, Douglas County Superior Court Justice Brian Huber in central Washington sided with those challenging the capital gains tax as a prohibited income tax. Attorney General Bob Ferguson appealed, saying Huber was wrong because the tax doesn’t relate to the property — it relates to what an owner does with that property by selling it.

In another letter from the Court Friend, the Edmonds School District and the Washington Education Association said they had agreed with the state that the capital gains tax was an excise tax. But, they said, if judges disagree and find it an income tax, then they should reverse their nearly century-old view that an income tax is a tax on wealth.

Unlike property, income is not something one owns and can sell, her lawyers wrote: “The cases of this court in finding that an income tax is a property tax were wrong when decided and they are wrong now.” .”

The arguments come as progressives in several states are pushing for the rich to pay more in taxes. Bills announced this month in California, New York, Illinois, Hawaii, Maryland, Minnesota, Washington and Connecticut all revolve around the idea that the wealthiest Americans will have to pay more. But the proposals all face questionable prospects.

Those challenging Washington’s capital gains tax say it could apply even if the taxpayer does nothing to make their profits — in other words, they’re taxed because they own the wealth, not because they do anything about it to have.

For example, a Washington resident who owns shares in a non-government company could benefit if the board decides to sell major assets, with the proceeds being passed on to shareholders, they wrote. In such a case, the tax would not be levied based on where the activity took place but rather on where the shareholder lives, with implications for interstate commerce under the US Constitution, they argued.

They say the government’s description of the measure as a consumption tax is merely a political maneuver to disguise its true nature. The 41 says capital gains are taxed as income, they argue.

Seven states have no income taxes at all — Washington, Alaska, Florida, Nevada, South Dakota, Texas and Wyoming — and two others, New Hampshire and Tennessee, only tax individual taxpayers’ dividends and interest income.

The challengers noted that since the 1930s, Washington’s voters have rejected ten times constitutional amendments or proactive measures that would allow or impose income taxes.

“Whether the existing tax system is desirable or should be changed is a fundamental economic policy issue not amenable to judicial decision,” they wrote.

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