When is income not income? When the Washington state Supreme Court says it’s not.
One provision of Washington state’s constitution reads, “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax.”
For decades, income in Washington state has been defined as property. That makes sense. If you earn income, that is your property. Put those two together and you conclude that if the state government is to tax income, it must impose a uniform rate. Also, another part of the state constitution limits the property tax to 1 percent. So any tax on income would have to be 1 percent or less.
But in 2021, the state legislature ignored the plain language of the constitution, plus decades of precedent, to impose a special 7 percent tax on one type of income, capital gains. That blows through the constitutional strictures in two ways.
First, as we pretty much all learned in first grade if not earlier, seven is greater than one. Second, because the tax is on the part of a capital gain that is above $250,000, it’s not uniform. So you would think the state’s Supreme Court would easily bat down that tax. If so, you would be wrong. On March 24, the Supreme Court voted, by a lop-sided 7-2 margin, to uphold the constitutionality of the tax.
How did the seven justices—I use that word loosely—justify their decision? Simple. They claimed that a tax on income was really an excise tax. Debra L. Stephens, one of the justices, wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”
Excuse me? If it were an excise tax, it would be levied on the sale of an asset. But the plain language of the law that the justices upheld says that it’s levied on capital gains.
Maybe that’s why she tried to change the subject, writing that because the tax “burden falls disproportionately on Black, Indigenous, and People of Color,” “Washington’s tax system perpetuates systemic racism.” Hmmm.
Instead, she should advocate cutting the sales tax rate from 6.5 percent (with local sales taxes, it can reach as high as 10.4 percent) to a lower level. That would definitely help lower-income people.
In an April 30, 2018, email, Senator Jamie Pedersen said the quiet part out loud, writing:
But the more important benefit of passing a capital gains tax is on the legal side, from my perspective. The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.