Opinion: Lawmakers wanted an income tax lawsuit — they’ll get two

Jason Mercier, director of the Center for Government Reform at the Washington Policy Center, discusses two lawsuits against lawmakers’ efforts to create a state income tax

This opinion piece was produced and first published by the Washington Policy Center. It is published here with the permission of and full attribution to the Washington Policy Center. 

Public records show lawmakers plan to use the capital gains income tax to set up a lawsuit to try to impose a broad-based graduated income tax. They’re going to get not one but two lawsuits from citizens fighting the unconstitutional income tax. It could be years, however, before we know if the state Supreme Court decides to uphold its numerous rulings saying that you own your income or if they’ll instead reverse course and take the bait from income tax supporters.

Jason Mercier
Jason Mercier

Just days after the legislature adopted SB 5096 (income tax on capital gains) the Freedom Foundation today filed this lawsuit in Douglas County. A separate group, The Opportunity for All Coalition (OFAC) also announced plans to file a future lawsuit. Here is the statement from OFAC President Collin Hathaway:

“The Opportunity for All Coalition (OFAC) plans to file a lawsuit against the recently passed statewide capital gains tax – which looks a lot like a state income tax. Washingtonians have rejected income tax measures 10 times before. The state’s constitution clearly prohibits this type of tax, something that its supporters know. On top of that, it is totally unnecessary given current state budget surpluses, and will only serve to inhibit job creation and economic prosperity.”

Washington’s state Supreme Court has consistently ruled that income is property (meaning you own it). This is why a graduated income tax has been prohibited without a constitutional amendment and a tax on income must conform with the constitutional restrictions on property taxes.

As for those who unequivocally says a capital gains tax is an income tax, I’m in good company. Every state in the country and the federal Internal Revenue Service (IRS) agree. According to the IRS:

“This is in response to your inquiry regarding the tax treatment of capital gains. You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

Whether or not the advocates of this tax proposal care that it is an income tax, this fact is not in dispute anywhere outside of Washington state.

Despite these facts, these emails from Sen. Pedersen discuss the goal for the capital gains income tax:

  • April 30, 2018: “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.” (emphasis added)
  • December 15, 2018: “I personally believe that adopting a capital gains tax is one of the best things we could do to help advance the possibility of an income tax in our state, because it could help resolve the legal uncertainty about whether an income tax is a ‘property tax’ subject to constitutional limitations. Until that happens, it would take 2/3 majorities in the legislature (and a vote of the people) to adopt an income tax, which makes it very unlikely to happen.” (emphasis added)

About that legal “uncertainty,” here is what the state Supreme Court said in 1960:

“The argument is again pressed upon us that these cases were wrongly decided. The court is unwilling, however, to recede from the position announced in its repeated decisions. Among other things, the attorney general urges that the result should now be different because the state is confronted with a financial crisis. If so, the constitution may be amended by vote of the people. Such a constitutional amendment was rejected by popular vote in 1934.”

Not liking the consistent message from the courts does not make the legal facts uncertain.

Remember, the voters have already rejected 6 constitutional amendments to allow a graduated income tax. The state Supreme Court last year also refused to hear the Seattle income tax case that was trying to challenge these prior court rulings.

With these new lawsuits we’ll see if the courts stay consistent or instead re-write the rules of the game concerning income taxes in Washington.

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

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