Early response to Washington’s capital gains excise tax (AKA income tax) court ruling

Mar 29, 2023

When an earthquake strikes it can take days, weeks, or even years to understand the full scope of what happened. This is also true of a court ruling that changes the entire tax landscape of a state. With that in mind, here is some of the early response to last week’s shocking 7-2 state Supreme Court decision ruling that a capital gains tax is an excise tax even though the rest of the world says that it is an income tax:

  • Tacoma News Tribune: “Legal arguments are fun and all. But if you’re clinging to dusty precedents and semantics in defense of a system that benefits the wealthy at the clear expense of everyone else, that’s not constitutional righteousness — it’s just deluded indifference. Or maybe something worse.”
  • Vancouver Columbian: “Let’s hope they know what they are doing. With the state Supreme Court on Friday upholding a capital gains tax in Washington, Democrats in the Legislature probably are feeling like the dog that finally caught the car. And all we can hope is that they know what they are doing. Because a capital gains tax is such a seismic shift in Washington tax policy that it likely will have unintended consequences . . . on Friday, the Supreme Court ruled that it is an excise tax, not an income tax. Tuh-may-toe, tuh-mah-toe, etc., they can call it what they want. But declaring that a capital gains tax is not an income tax requires some cognitive gymnastics.”
  • KUOW: “A wealth-management company says it's pulling its headquarters out of Washington state in the wake of the state's Supreme Court decision around capital gains taxes. In a seemingly sarcastic statement, Fisher Investments says: ‘In honor of the Washington State Supreme Court's wisdom and knowledge of the law, and in recognition of whatever it may do next, Fisher Investments is immediately moving its headquarters from Washington state to Texas.’ The move is expected to be completed by June 30 . . . Fisher is now part of a wave of companies relocating to Texas. That state has fewer business regulations, no income taxes, and lower costs of living.”
  • Forbes op-ed: “Ryan Ellis, an IRS-enrolled agent and president of the Center for a Free Economy, says the majority opinion is ‘absurd.’ ‘An excise tax is a government tax on the sale of a thing, usually a Pigouvian thing. Booze, beer, tobacco, etc.,’ adds Ellis. ‘No serious tax expert would call the realization of a capital gain an occasion for an excise tax. It’s clearly in the income tax bucket.’”
  • Tax Foundation: “Words matter—at least they’re supposed to, notwithstanding the court’s conclusion that a tax on income is not an income tax—so it is necessary to delve into the somewhat strange verbiage of Washington’s constitution, along with the linguistic gymnastics the court performed to endorse a tax on capital gains income . . . If the state’s capital gains income tax were a tax on a transaction or on the exercise of a privilege, it would apply to every sale of a capital asset. Instead, it is based on the aggregate net capital gains income from all transactions, with an income exclusion to ensure that the tax only applies to high earners. Reportable net capital gains income is pulled directly from taxpayers’ federal income tax returns. Clearly, the tax is on income, not transactions . . . In the not-too-distant future, an income tax is coming for them, and it will wipe out the one major tax advantage Washington has over its competitors.”
  • Wall Street Journal: “The majority’s logic contradicts common sense, nearly a century of state law, and the view of the U.S. Internal Revenue Service, which defines capital gains as a form of income. The majority opinion boasts that ‘forty-one other states and the District of Columbia tax capital gains.’ Yes, and every one considers capital gains to be income . . . Washington State now has a capital-gains tax imposed by judges, and watch Democrats seek to build on the judicial ruling by trying to redefine other income taxes as excise taxes. The new tax bills start arriving in April. Enjoy.”

Here is the video update I provided for Washington Policy Center members yesterday on the court ruling (starts at 14:07 mark).

I’ll update this post as more editorials are published on the court’s capital gains tax decision.


Here is additional commentary on the court ruling: 

  • Crosscut: "Jeffrey Gramlich, a professor of accounting at Washington State University, criticized the court decision, saying it puts Washington state at odds with 'the rest of the world.' 'Everyone in the rest of the world views gains on capital assets as an income,' said Gramlich, director of the Hoops Institute for Taxation Research and Policy. He added: 'I think when you have a ruling like this ... it makes us kind of weird, in the eyes of the business world.'"
  • MyNorthwest: “Voters of the state have voted no less than 10 times against a progressive income tax in the state at some point, we ought to respect the voter’s wishes and not try to circumvent them by going through the court system,” McKenna said. “The courts are not supposed to be policymaking bodies, they are supposed to enforce the law and interpreted it as they find it.”
  • GeekWire: “It may mean that fewer small businesses are born and more small businesses die prematurely,” he said. “Or, similarly, more businesses leaving town for states without capital gains taxes.”
  • Fox Business News: "Washington's capital gains tax 'walks, talks, acts' like an income tax."

Additional Information
Washington versus the world on capital gains income taxes

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