The U.S. Supreme Court refused last week to hear a taxpayers’ challenge to the constitutionality of Washington state’s new capital gains tax after it was upheld by the state’s supreme court.
The decision came days before Washington Secretary of State Steve Hobbs (D) certified on Jan. 23 that a petition for an initiative to repeal the tax contained enough voter signatures to qualify for the state ballot. The proposed initiative still has to go before the Washington State Legislature before it can appear on the ballot for the election on Nov. 5.
The ruling also came after Amazon’s billionaire founder, Jeff Bezos, announced on social media two months ago that he was moving from Washington to Florida. Mr. Bezos said he was moving to the Sunshine State for several reasons, including to be closer to his parents and operations for Blue Origin, his space exploration company.
By unloading about $15.7 billion worth of Amazon stock before the new capital gains tax took effect, Mr. Bezos saved more than $1 billion in taxes, according to Marcum LLP, a national accounting and advisory services firm.
“Relocating to Florida ensures that future stock sales won’t be subject to Washington’s capital gains tax, providing Bezos with significant tax savings.”
And he won’t be subject to a proposed law now being discussed in Washington that would impose a 1 percent wealth tax on tradeable net worth above $250 million, the firm said.
Unlike most states, Washington state has no income tax on individuals or corporations.
Limited-government advocates fear that the state’s capital gains tax, which has an extraterritorial effect, could open the door to a graduated income tax in the state.
The U.S. Supreme Court denied the petition for certiorari, or review, in Quinn v. Washington on Jan. 16. No justices dissented. The court did not explain its decision. For the case to be heard by the court, at least four of the nine justices must vote to grant the petition.
Democrats, including Washington Gov. Jay Inslee, justified the capital gains tax as a means of making the state tax system fairer.
State lawmakers argued Washington’s tax system was economically regressive, by which they meant the burden of paying for roads, schools, and other public programs fell disproportionately on low-income residents.
In 2021, the Democrat-controlled state legislature passed legislation imposing a 7 percent tax on capital gains above $250,000 on individuals for the sale or exchange of long-term capital assets such as stocks, bonds, and business interests, as well as other investments and tangible assets.
The tax law came into force on Jan. 1, 2022.
Washington’s constitution requires that property and income taxes be assessed uniformly.
However, the Washington Supreme Court reversed a lower state court ruling and held that the tax was exempt from state constitutional restrictions because it’s an excise tax on the sale of assets rather than a tax on the income resulting from the transaction.
‘States Have No Power to Interfere With Another State’s Power’
The Freedom Foundation, which brought the lawsuit on behalf of several state taxpayers, argued that the capital gains tax violates the commerce clause of the U.S. Constitution, which reserves to Congress—not states—the power to regulate interstate commerce.As currently constituted, the tax applies not to the sale of capital assets in Washington state, but to the sale of capital assets by Washington residents. This means that the tax could apply to the sale of capital assets held in other states by Washington residents, and the sale could also be taxed by the state in which the sale takes place, the group argued.
Eric Stahlfeld, the Freedom Foundation’s chief litigation counsel, told The Epoch Times last summer that the tax “violates the ‘dormant’ commerce clause. “States simply have no power to interfere with another state’s power over activities within that sovereign state.”
The tax applies to all Washington residents or people who live in the state for more than 183 days a year, and “it taxes all of their long-term gains even if those gains came from a transaction which had no ties whatsoever to Washington state,” he said at the time.
“That’s what we argue is unconstitutional because Washington is extending its tax and regulation authority into the jurisdictions of the other 49 states.”
“This would be potentially the first time any state has squarely tried to do this,” Mr. Stahlfeld said.
Maxford Nelsen, the Freedom Foundation’s director of research and government affairs, told The Epoch Times in a Jan. 23 interview that he was disappointed that the U.S. Supreme Court denied the petition for certiorari.
“It’s unfortunate that the Supreme Court didn’t take the opportunity to correct the legal and policy errors of Washington lawmakers, but it would be a full-time job for the Supreme Court to wade into trying to fix every problem that our state passes,” he said.
“It will potentially open the door for an expansion of income taxes in Washington state and further erode our economic competitiveness.”
The tax may be increased in the future, Mr. Nelsen said.
“The legislature, as it is currently constituted, is intent on expanding the scope of the tax and I assume, increasing the tax rate. So, Washington residents and taxpayers shouldn’t expect any relief from the state legislature.”
The legislature has several options for dealing with the referendum question, Initiative 2109, to repeal the tax.
It can adopt the initiative by passing it into law, which probably won’t happen, Mr. Nelsen said.
The second option would be “to refer the initiative to the ballot in November for the voters to approve or reject.”
The third option would be “to refer the initiative to the voters and to place a second alternative proposal on the ballot as well.”
‘Deep Skepticism’
Initiative 2109 has a shot at becoming law, Mr. Nelsen said.“Even with a consistent trend of electing Democrats to statewide office and Democratic majorities to the legislature, Washington voters have a long history of rejecting income tax proposals in the ballot, including income tax proposals that are structured to target the very wealthy.
“So, there’s a deep skepticism, at least historically, among the voting electorate of Washington state for new taxes layered onto the existing tax structure that we all pay into.”
The capital gains tax could also end up in court again at some point, Mr. Nelsen said.
The Washington Supreme Court decision “left the door open for an as-applied challenge to be brought by a particular taxpayer that would have been affected … down the line.”
An as-applied challenge is one in which a plaintiff argues that an otherwise constitutional statute operates unconstitutionally as to the plaintiff because of that person’s specific circumstances.
In the future, someone who is taxed twice for the same sale by two different states could file a lawsuit in court, he said.
Beverly Crichfield, a communications consultant with Washington’s Department of Revenue, said the agency appreciated the Supreme Court’s decision not to take the case.
“The Department of Revenue recognizes the court’s decision and thanks the court for its consideration in this matter,” she said by email.
