Tomorrow, the Washington Supreme Court will hear oral arguments from the attorney general and a group of wealthy conservatives about the legitimacy of our state’s power to tax the wealthy.
A decision in favor of the whiny rich who are suing the state over the new capital gains tax would leave us in financial trouble. A decision in favor of the state could pave the way for Washington to finally get the rich to pay their fair share of funding for our education system. A really cool decision for the state could give lawmakers the power to create an entirely new — and much fairer — tax system.
We don’t know exactly when the court will make its decision — although we do know it will be a Thursday — but we do know they basically have these idiotic, cowardly, and really sound options.
The idiotic approach: stick to the trial court
Why is taxing these 8,000 or so rich people even sparking a legal controversy? For nearly a hundred years, previous rulings by a slim anti-tax majority of the Court have classified income as “property.” Washington’s constitution limits taxes on wealth to a maximum of 1% and requires the state to tax uniformly, effectively preventing us from taxing the wealthy more than the working class.
Finally, last year, the state legislature passed a 7% tax on capital gains, which are profits from the sale of stocks and other financial assets to fund education. This tax applies to winnings over $250,000, subject to certain exceptions such as B. Gains from the sale of a family home or small business.
Rich people then sued, claiming their profits were income and therefore constitutional property, which would render the 7% tax and other provisions of the new law unconstitutional. A trial court judge in Douglas County then agreed with that argument, but the attorney general’s office appealed.
On behalf of the state, the AG argues that the capital gains tax is actually a “consumption tax” and therefore conforms to the constitution.
Consumption taxes are levied on transactions, e.g. B. if you pay sales tax on your grocery purchases. In contrast, the government collects annual income and wealth taxes. Because the trigger for capital gains tax is the sale of an asset, the legislature referred to capital gains tax as a consumption tax.
The trial court judge disagreed, arguing that the capital gains tax contained several “characteristics” of an income tax. For example, like an income tax, the state collects the capital gains tax annually rather than at the time of the transaction. As with an income tax, the state uses federal income tax forms to find out how much someone owes of their capital gains taxes. And as with income tax, the state offers a charity deduction on capital gains.
That reasoning sounds kind of smart, but it just doesn’t fit how consumption taxes work in Washington state, as the attorney general’s office argued in their brief to the Supreme Court.
For example, the state uses federal income tax forms to facilitate collection of estate taxes, which people pay when they inherit a bunch of money. The state also allows a charity deduction for this tax. And yet the courts have upheld the estate tax as a valid excise tax.
The Washington sales tax, the textbook example of an excise tax, also works like the capital gains tax. While customers are charged sales tax at the time of each transaction, the government regularly collects it from retailers — just like capital gains tax. In addition, state legislation exempts certain products, such as vegetables and other groceries, from sales tax, just as they exempt profits from the sale of a family business from capital gains tax.
A trial court settlement and a capital gains tax reduction would ignore these flaws in the judge’s reasoning and deprive the state of an estimated $500 million that lawmakers earmarked for funding Washington’s schools and severely underfunded child-care system. For a number of judges who have to stand in state elections to keep their jobs, that doesn’t seem wise.
The Coward’s Way Out: Agree with the Attorney General
While taking money away from children and working parents would help the super-rich, it would likely spark a backlash at the ballot box, but paving the way for a broader progressive income tax could also backfire for judges next time put up for re-election. Fortunately, the Attorney General’s office has shown them a way out of this sticky loophole.
In their briefs, the Attorney General’s attorneys argue that there is enough similarity between the capital gains tax and other consumption taxes, such as the sales tax and inheritance tax, for the court to avoid addressing the concept of whether income is in fact property. They contend that capital gains tax is not an income tax but a tax on the use of property by an individual to generate income and therefore fits the definition of an excise tax.
Washington State tax policy legal experts agree with this analysis.
At a press conference last week, attorney Howard Goodfriend said the group of law professors he represents have studied state capital gains and use taxes across the country and have concluded that almost every other government treats its capital gains tax as an use tax. Goodfriend added that his clients believe that “the Supreme Court will recognize that the legislature has broad powers to develop transaction taxes to fund the basic needs of their citizens.”
That route would preserve the $500 million that the capital gains tax would bring in to fund education, but it wouldn’t solve Washington’s more fundamental problem of not having the power to enact a progressive income tax. Plus, it’s still possible that the ruling will so anger the mega-rich that they’ll use some of their massive wealth to fund assault charges against the judges voting to keep the tax in their next candidacy.
The bold (and right) way: legalize income taxes
As the Conservatives on the US Supreme Court showed us last summer when they quashed it Roe v. calf, the law is simply what the highest court in a given place says. And while there probably isn’t a need for our Supreme Court to overrule the outdated cases that functionally prohibit a state income tax, they should seize the opportunity to do so before them — especially considering the coward’s way out doesn’t mean they don’t We’ll save that from rich super PAC ads anyway.
After all, these previous decisions have forced Washington to over-rely on sales and property taxes, making us the state where poor people pay most of their income in taxes compared to rich people. This leads to terrible results, such as people living on fixed incomes having to choose between paying absurdly high property taxes or paying for their prescriptions.
But won’t it end up fixing our tax laws so that rich people actually pay what they should to fund our schools and social services, causing them to flee the state? At a news conference last week, Andy Nicholas of the Washington Budget & Policy Center said that the favorite refrain of the rich and their bootlickers has been “thoroughly studied and debunked.”
“Interstate migration is much more driven by housing costs, good schools and quality parks — all things that are actually paid for through taxes,” Nicholas said.
Still, those who are hoping for a show of courage and principle from the Supreme Court should not hold their breath. Hugh Spitzer, a professor of constitutional law at the University of Washington who has studied the constitutionality of income taxes in Washington for more than 20 years, expressed pessimism about the court overturning the ruling banning income taxes.
“I would be thrilled if the Supreme Court overturned the 1933 case and said an income tax is constitutional,” Spitzer said at a news conference last week. “My guess is they won’t.”