March 3, 2022

On March 1, 2022, the Washington State Long Term Capital Gains Tax was ruled unconstitutional by  the Douglas County Superior Court. It is expected that this decision will be appealed, leaving the final decision with the state Supreme Court.

The primary debate is over whether the 7% tax on capital gains above $250,000 is an excise tax or an income tax. Originally, the State categorized the tax as an excise tax because it applied to the sale or transfer of property and therefore, by their definition, made this an excise tax.

However, appealers against the tax argued that the tax is levied on capital assets and capital assets are considered income, which would classify this as an income tax (among other reasons). Upon landing on the conclusion that the capital gains tax is an income tax, one of the court’s conclusions was that the tax violates the Washington State Constitution that guarantees uniformity. The principle of uniformity, at a high level, is that similar items should be taxed equally. The fact that the Washington State Capital Gains Tax imposes a 7% tax on capital gains only for gains of more than $250,000 threatens the principle of the state’s uniformity clauses.

The original tax passed in 2021, with an effective date of January 2022, was estimated to affect about 7,000 individual taxpayers and raise more than $440 million annually in 2023. The tax was intended to primarily fund early education programs, childcare and school construction.

Stay tuned for further communication on the progress of this tax and the implications it has for Washingtonians.