Washington Now Has An Income Tax

• Jurisdiction: Washington,United States
• Published date: 20 April 2023
• Subject Matter: Tax, Income Tax, Capital Gains Tax, Property Taxes
• Law Firm: Seyfarth Shaw LLP
• Author: Tess Rabin and Robert S. Over
• topic: Constitutional Law,Tax Law

The Washington State Supreme Court ruled on March 24, 2023 that the state's new capital gains tax is constitutional in a landmark decision that will forever change the battle on how to make Washington's tax system more progressive. Washington state has avoided an income tax since passing a 1930 amendment to Article VII of its Constitution that prohibits graduated taxes on "property," with such term broadly defined to include money.¹ That all changed when a 7-2 ruling from the Washington State Supreme Court in Quinn v. State, No. 100769-8, slip op. (Wash. 2023) (en banc) held that a capital gains tax is not a tax on property (i.e., money), but a tax incident to the receipt of money, or a tax incident to the exercise of a privilege or right "in and to property."²

The Court wrote, "The capital gains tax is appropriately characterized as an excise [tax] because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves."³ The new capital gains tax applies to profits in excess of $250,000 derived from the sale of certain mutual funds, stocks and bonds.⁴ Because it is not a tax on property (it is a tax on the exercise of property rights), it is not subject to the uniformity and levy requirements of article VII of the Washington Constitution and therefore the capital gains tax is constitutional. This ruling opens up the door to expand the type of assets subject to the tax to all assets involved in any transaction, and of course reducing the profit threshold from $250,000 down to any profit whatsoever. Given the state's progressive tendencies...