The Washington Supreme Court upheld the state’s new capital gains tax on Friday, 24 March 2023. Lawmakers put it in place to try to balance out what is thought to be the most unfair tax system in the country.
In a 7-2 vote, the justices decided that the tax was an excise tax, not a property tax, which the state constitution says can’t be more than 1% per year, or an income tax, which the Supreme Court has said is unconstitutional since the 1930s.
“For 134 years, Washington state has been waiting for the day when a fairer tax system came about, one where working people were not carrying an inequitable share of the burden,” Gov. Jay Inslee, a Democrat, said in a statement.
“Today is that day. Washington’s capital gains tax helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents.”
Washington is one of only nine states that doesn’t have an income tax, and most of the burden of paying for schools, roads, and other public expenses with sales and fuel taxes falls on low-income residents.
Lawmakers say they pay at least six times more in taxes as a share of their income than the wealthiest residents. People with a middle-class income pay two to four times as much.
Inslee and the majority of Democrats in Olympia wanted to start fixing this problem in 2021, so they put in place a 7% capital gains tax on the sale of stocks, bonds, and other high-end assets, with exemptions for the first $250,000 each year and gains from the sale of retirement accounts, real estate, and some small businesses.
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It was supposed to be paid by 7,000 people, or less than 1 in every 1,000 residents, and bring in nearly $500 million a year to help pay for public education in Washington.
But wealthy residents, business groups, and agricultural groups went to court to stop it. They said it went against the state and federal constitutions and would make people less likely to invest in the state.
The challengers said the state was trying to hide that the capital gains tax was an income tax by calling it an excise tax. An excise tax is a tax on certain goods, services, or activities. In this case, the state insisted that it was not a tax on property or income but on what someone does with their property by selling it.
Jared Walczak also tweeted about the recent news:
Capital gains are treated as income in the 41 states that tax them. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming are the only other states with no income tax. Only dividends and interest income earned by individuals is taxed in New Hampshire.