Opinion: First amicus brief filed in capital gains income tax case

Jason Mercier of the Washington Policy Center shares information about Washington’s capital gains income tax case.
File photo.

Jason Mercier of the Washington Policy Center shares information about Washington’s capital gains income tax case 

Jason Mercier
Washington Policy Center

The first amicus brief was filed today in the capital gains income tax case. Washington Policy Center joined the “Tax Economists and Policy Analysts Amicus Brief.” 

Here are a few of the pull quotes from the national amicus brief:

Jason Mercier
Jason Mercier
  • “Roses and ducks have definite characteristics and functions inherent to what they are, and retain those even if a Legislature or an attorney chooses to call them by a different name.”
  • “The scope of Washington’s constitutional taxpayer protections is certainly a matter for Washington’s courts and to decide the persuasive relevance of how other states interpret analogous protections to ban income taxes or limit property taxes or allow excise taxes. But what an income tax is, or how all excise taxes operate, are not mere differences of state rules. Words have meaning, particularly in this field of tax where legislators have a political incentive to disguise things. Washington’s Legislature may call this tax an excise tax, but if it operates like an income tax, it is an income tax and any applicable taxpayer protections relevant to income taxes should apply.”
  • “Excise taxes and income taxes are different things. To be sure, like all taxes, all three collect revenue for the government, and that revenue is ultimately and economically borne by individuals in some fashion. Beyond that, they operate different ways, affect the economy differently, and consequently have been subject to varying taxpayer protections. The meaning of each of these types of tax have taken on clear definitions that have been consistently applied in the public finance and economic literature, in court cases, and in common parlance.”
  • “Roses are roses, ducks are ducks, and taxes on capital gains are taxes on income. Excise taxes or transaction taxes do not have exemption levels, nor are they imposed on annual totals, nor do they track the filing deadlines and requirements of the federal income tax. State income taxes do all those things. Washington taxpayers will fill out a return due the same day as the federal income tax, and the base of the tax will be derived from capital gains taxed under the federal income tax and state income taxes. The IRS, every other state, and every tax expert agree that capital gains are income.”
  • “The Washington capital gains tax is not a per unit consumption tax on individual transactions by those buying or selling a particular good but on the aggregate total income itself, measured ad valorem tax as a percentage of income and imposed broadly on all economic gains by anyone in the state. The tax is accompanied with exemptions and deductions to limit the scope of the tax to certain individuals, with the goal of it applying not universally to an activity but to those individuals with relatively high levels of income. The tax is not on transactions or activity, much less on the entirety of the sale price of an asset or all gross receipts of a business, but on the net aggregate capital gains earned by a person in a year. These are all features of income taxes, not excise taxes.”
  • “The Washington capital gains tax is an income tax, not an excise tax. To the extent Washington’s Constitution or precedents preclude an income tax, this tax should be precluded.”

Also joining today’s national amicus brief was Tax Foundation expert Jared Walczak. Jared wrote in a blog last week:

“Washington’s capital gains tax is designed as a direct tax, not an indirect one. It taxes out-of-state earnings and out-of-state activity. If we accept the state’s argument that it’s an excise tax, then it’s probably an unconstitutional one, because it fails to meet the nexus requirements established in cases like Complete Auto Transit v. Brady. If, on the other hand, it’s a direct tax, then we have nexus — but we’ve also acknowledged that it’s an income tax, which is what Washington can’t afford to acknowledge.

Of course, it is an income tax. Let’s go back to that distinction between an indirect tax on things made, sold, or used — or, put another way, on activities and transactions — and a direct tax, which would be on an individual’s earnings or possessions. It’s possible to impose an excise tax on the activities surrounding capital gains — bad policy, but possible. If Washington had chosen to levy a tax on sales of stocks or bonds, such a stock transfer tax would be an excise tax, because it’s based on the transaction or activity. Washington’s tax, however, is not based on the number of transactions, or on any activity, but on the net capital gains income earned over the course of the year. The object of the tax is clearly the person, with a focus on their aggregate income. It is a direct tax. It is literally denominated in income. It is, in short, an income tax.”

The fact that a capital gains tax is an income tax is not in dispute nationally. Even Washington State tax experts acknowledge this clear fact. Earlier this year I had the opportunity to interview University of Washington Professor Scott Schumacher, Director, Graduate Program in Taxation to learn more about his thoughts on Washington’s new capital gains income tax. From our conversation:

Professor Schumacher: “A capital gains tax is a tax on income. The federal tax laws define the term ‘income’ to include ‘gains derived from dealings in property,’ which includes capital gains. Notably, the new Washington State tax determines the amount to be taxed from the federal net long-term capital gains reported by the taxpayer. Thus, the Washington Capital Gains Tax takes an amount that is subject to income tax at the federal level and imposes an additional amount of tax on that income . . . 

If the capital gains tax is an income tax (and I think it is), then it would be unconstitutional under the Washington Constitution. The Constitution provides that all taxes on property must be uniformly applied and cannot exceed an annual rate of 1%. Here, the capital gains tax does not apply to everyone (and therefore is not ‘uniformly applied’) and the rate is 7%.”

On February 4th of next year we’ll see if the court agrees with the rest of the country that this is clearly an income tax, or instead agrees with those pushing the odd narrative that a tax on capital gains income is somehow an “excise tax.”

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center.

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