Freedom Foundation warns budget writers capital gains taxes will result in lawsuit

Washington State House and Senate budget negotiators on Friday were rumored to have reached a tentative agreement on spending levels that could signal an end to the impasse that’s divided the Legislature since the 2015 session convened six months ago.

  • Friday, June 5, 2015 6:36pm
  • News

The following is a release from the Freedom Foundation:

Washington State House and Senate budget negotiators on Friday were rumored to have reached a tentative agreement on spending levels that could signal an end to the impasse that’s divided the Legislature since the 2015 session convened six months ago.

It was unclear from first reports whether the deal would require a tax increase, but if lawmakers agree to impose a capital gains tax — as Democrats have consistently proposed — the state could be facing a lawsuit on behalf of state residents filed by the Freedom Foundation.

“Proponents have attempted to compare the proposed capital gains tax to Washington’s real estate excise tax,” said Amber Gunn, an Economic Policy Fellow with theFreedom Foundation. “But such a comparison easily breaks down. The real estate excise tax is paid whenever a property is sold, even when that property has declined in value.”

But the proposed capital gains tax is only triggered if the property has created a “gain” for the seller above a specified exemption level.

“The state recognizes this is tenuous legal ground,” Gunn said. “(The proposal’s) fiscal note assumes ‘up to five Superior Court actions will be filed challenging the constitutionality of the capital gains tax.’

“That’s one assumption they can count on,” she said.

The point of contention is that, under Washington’s constitution, all income taxes must be imposed equally. Capital gains tax supporters argue this isn’t an income tax, but the state Supreme Court has been unambiguous in ruling that property constitutes income.

“If capital gains are income, and if income is property, then property is subject to uniform taxation,” Gunn said.

The problem is, the capital gains tax models being floated by Democrats don’t do that.

“All of the various bill introducing the capital gains tax contain a progressive scheme,” Gunn said, “usually only imposing the tax on those who earn more than $25,000 in capital gains per year.”

According to the Freedom Foundation’s senior legal fellow, retired Washington State Supreme Court Justice Jim Johnson, such a scheme would violate the state’s constitution.

“Any lack of uniformity in an income tax scheme is unconstitutional,” he said.

The Freedom Foundation is an Olympia-based free-market think tank that promotes smaller government, fiscal responsibility and greater transparency.


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