The Sunday Observer: Capital gains tax legal fight is about to heat up

Ballot initiative operatives prep in case court challenge fails

The early skirmishes of the legal battle over the state’s new tax on capital gains have played out quietly in an obscure courthouse in Eastern Washington, but that fight’s about to get louder.

Douglas County Superior Court Judge Brian Huber holds a summary judgment hearing on the case against the tax this Friday, and will likely issue a ruling within weeks or months. Meanwhile, a nascent ballot initiative campaign made up of familiar mercenary operatives has formed, just in case the legal battle goes the state’s way. More on that later. First, let’s look at the court case.

To review: Last year the Legislature passed Senate Bill 5096, imposing a 7 percent tax on most capital gains¹ over $250,000 realized after Jan. 1 of 2022. The tax is expected to bring in hundreds of millions of dollars per year from a few thousand of the state’s wealthiest households. Think about a founding Amazonian selling off $10 million in stock she got for $100,000 back when the online behemoth was a comparatively quaint online bookstore. She owes $675,500 in tax on a $9.9 million gain.

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The money is linked to a massive planned expansion of the state’s support for child care and early learning. It was also intended as a start on restructuring a tax system that falls heavily on the poor and lightly on the extremely wealthy.

Some of the extremely wealthy sued almost immediately, arguing that the tax violates a Washington Supreme Court ruling from 1932 that found a graduated income tax unconstitutional. That precedent essentially forbids most forms of progressive taxation — taxes that hit the rich harder than the poor.

Here’s why you should care about this: The outcome of this case could dramatically shake up tax law in Washington. A win by the challengers could lock in the existing system for a generation or more. If the courts side with the state and progressive taxation advocates, the size and nature of your tax bill could change significantly in coming years.