The tax revenue is dedicated to education and facilities for Washington’s public schools

Randy Bracht
The Center Square Washington

Washington state has received just over $859.2 million in revenue from its new capital gains tax since collection began Feb. 1.

As of Wednesday, a total of 6,012 capital gains accounts have been registered with the state Department of Revenue, 1,605 returns have been filed, and 3,457 payments have been received for the $859 million total, DOR Communications Manager Mikhail Carpenter said in an email reply to The Center Square.

The tax revenue is dedicated to education and facilities for Washington’s public schools. It is being collected even as litigation continues regarding its validity and application outside the state’s borders.

The deadline for filing a return was April 18, but affected taxpayers – an estimated 1% of the state’s adult population – could request an extension to Oct. 16. The department received 2,585 requests. Carpenter said those who were granted extensions still had to make an estimated payment by the April deadline.

“We won’t have a final figure until those extended returns are submitted and processed after the October extended deadline,” he said. “Because the payments are estimated, some taxpayers will have overpaid and be due refunds while others may owe more.”

By law, the first $500 million must be deposited into the state’s Education Legacy Trust Account and spent only after appropriation. The money can only be used to support public and authorized charter schools below the college or university level, early learning and childcare programs, expanding access to higher education, and other “educational improvement efforts.” Any funds above the $500 million threshold are then placed into the state’s common school construction fund.

In 2021, the state Legislature passed the bill Engrossed Substitute Senate Bill 5096, which creates a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests or other investments and tangible assets. The tax became effective on Jan. 1, 2022, and first payments on last year’s taxes were due this April. The tax only applies to capital gains allocated to Washington state that exceed an annual standard deduction of $250,000. Various exemptions include real estate, assets held in some retirement accounts, livestock, commercial fishing privileges, and gains from the sale of most family-owned small businesses.

A fiscal note accompanying the legislation estimated it would apply to about 3,200 “payers” this year, but the 6,102 registered accounts has almost doubled that number already. The Department of Revenue established a “capital gains team” to review filed returns that are compared to tax returns submitted to the Internal Revenue Service, said Carpenter.

Following its enactment, opponents challenged the measure, arguing Washington’s state constitution mandates that all taxes on “property,” including income derived from capital gains, must be uniform and capped at 1%, not 7%. Last year, a Douglas County Superior Court judge agreed and struck down the law.

State Attorney General Bob Ferguson appealed to the Washington State Supreme Court. In a 7-2 decision issued in March, the court majority ruled it was an excise tax, not a property tax, and overturned the superior court.

On Monday, the conservative think tank Freedom Foundation and a group of citizens petitioned the U.S. Supreme Court to review the state Supreme Court’s opinion. Since many state residents’ securities transactions occur beyond Washington borders, they contend the capital gains tax violates the U.S. Constitution, arguing that only Congress, not individual states, can regulate interstate commerce. Critics also fear it could open the door to a graduated state income tax, which Washington does not have.

“Washington’s liberals in every branch of government have long lamented the absence of an income tax in the state and sought ways to generate additional revenue by taxing high earners at a higher rate than those earning less,” the foundation said in a news release.

The U.S. Supreme Court has a conservative 6-3 majority and it remains to be seen if four justices will move to accept the foundation’s petition for review.

Washington Gov. Jay Inslee has strongly supported the new capital gains tax. While the governor’s office has not yet reviewed the Freedom Foundation’s filing, spokesman Mike Faulk on Thursday said it “appears to be a last-ditch effort by wealthy interests to undo a law meant to bolster programs supporting children and families.”

“We’re not the only state with a capital gains tax and I’m not aware of the Supreme Court overturning any of those,” said Faulk. “Washington had one of the most regressive tax codes in the nation prior to establishing this tax, which asks the state’s wealthiest residents to pay their fair share.”

This report was first published by The Center Square Washington.