Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
![Temple of Justice Olympia Washington for Washington state capital gains tax ruling](https://cdn.mos.cms.futurecdn.net/cSe7Lh3pyETJq466QMAJ3G-415-80.jpg)
![Kelley R. Taylor](https://cdn.mos.cms.futurecdn.net/K4UVmV3JrZhRQQQiGM5Fah.jpg)
Capital gains tax is back in the news. The Supreme Court in Washington ruled that the state’s 7% capital gains tax which was enacted two years ago, is constitutional. The controversial ruling, which essentially says that capital gains taxes are not property taxes in Washington state, came on the heels of President Biden’s FY24 budget proposal calling for a near doubling of the national capital gains tax rate.
Additionally, a recent survey shows that most Seattle voters would support a proposed citywide capital gains tax. If passed, the measure would be similar to the statewide capital gains tax on sales of stocks and bonds over $250,000 in a year.
Washington Governor Jay Inslee welcomed the state supreme court ruling, which has paved the way for what was initially estimated to be $1 billion in projected revenue from the tax.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
“Washington’s capital gains tax helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents,” Inslee said in a statement.
The state's Department of Revenue, as of April, reported over $830 million in revenue from the capital gains tax measure. (That amount, which comes from early state taxpayer filing data, is so far on pace to exceed the projected revenue for 2023 of $248 million.)
The Washington Policy Center, a nonprofit think tank that opposes the capital gains tax, called the court’s ruling in Quinn v. State of Washington a distortion of the “clear language of the state constitution.”
And in late August of last year, the Freedom Foundation, a conservative think tank, filed an appeal with the U.S. Supreme Court. The group wants the court to take up the case and find that the state's capital gains tax violates the Commerce Clause of the U.S. Constitution. However, in January 2024, the U.S. Supreme Court declined to hear the case.
Washington State capital gains tax
The Washington capital gains tax at issue is 7% on the sale or exchange of individual long-term capital assets (e.g., stocks, bonds, business interests, etc.) that exceed $250,000. Only the portion of gains above the threshold is subject to the tax and some assets are exempted from the tax. A small number of Washington taxpayers overall, (i.e., about 5,000 people) are expected to be subject to the tax.
The legal argument against the tax (from a state law perspective) is mainly that capital gains are income and that income is property. Under the state's constitution, property tax is limited to one percent. So, opponents of the capital gains tax (and the court's two dissenting justices) contend that the 7% capital gains tax in Washington is unconstitutional.
However, in the majority (7-2 ruling) the Washington Supreme Court found the capital gains tax in Washington to be a legal excise tax — not a property tax. Justice Debra L. Stephens wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”
The ruling sets Washington state apart from other states (and the IRS) that consider capital gains taxes to be income taxes. Washington state officials say that the revenue collected from the capital gains tax will help fund public education in the state. Meanwhile, some opponents worry that the capital gains tax could discourage business in the state.
Excise taxes?
The Washington capital gains tax case also raises questions about excise taxes. Excise taxes are special taxes on specific types of goods or services. (You may have heard of a gasoline excise tax or a tobacco or cigarette excise tax). Excise taxes are typically included in the price that you pay for the specific product (i.e., businesses typically pass the taxes onto consumers),
But some excise taxes are paid directly by consumers. For example, there are excise taxes levied on retirement accounts when account holders fail to take required minimum distributions (RMDs) on time. Additionally, property taxes can be another kind of excise tax that consumers pay directly.
The court ruled that the capital gains tax is an excise tax on the sale of certain goods — in this case, individual long-term capital assets that exceed $250,000. That’s because the Washington Supreme Court court found that in Washington, a property tax is a tax on “mere ownership” of property; while the capital gains tax taxes the power to sell and transfer the property.
Which states have capital gains tax?
Currently, forty-one states and the District of Columbia tax capital gains and the federal government taxes capital gains. But the 7% capital gains tax aside, Washington state doesn't have state personal income tax.
Related Content
![Kelley R. Taylor](https://cdn.mos.cms.futurecdn.net/K4UVmV3JrZhRQQQiGM5Fah.jpg)
As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
A Bunch of IRS Tax Deductions and Credits You Need to Know
Tax Breaks Lowering your taxable income is the key to paying less to the IRS. Several federal tax credits and deductions can help.
By Kelley R. Taylor Last updated
-
Don’t Miss This $2,500 Tax Break for Paying Your Student Loan
Tax Deductions Do you qualify for the student loan interest deduction this year?
By Katelyn Washington Last updated
-
Six Tax Breaks That Get Better With Age
Tax Breaks Depending on your age, several tax credits, deductions, and amounts change — sometimes for the better.
By Kelley R. Taylor Last updated
-
Biden Proposes New Homebuyer Tax Credits
Tax Credits President Biden is calling for new middle-class tax breaks including a mortgage tax credit.
By Kelley R. Taylor Last updated
-
Will Florida Property Tax Be Eliminated?
Property Taxes A new proposal is raising questions about revenue generation in the Sunshine State.
By Kelley R. Taylor Published
-
States That Won't Tax Your EV
State Tax Most states impose additional fees on electric vehicles, but these states don’t penalize EV owners, and some also offer other tax incentives.
By Kelley R. Taylor Last updated
-
Tax Season is Here: Big IRS Tax Changes to Know Before You File
Tax Filing Tax deductions, tax credit amounts, and some tax laws have changed for the 2024 tax filing season.
By Kelley R. Taylor Last updated
-
Your Arizona Family Rebate is Taxable: What to Know
State Tax Thousands of Arizona families will need to report income from special child tax relief payments.
By Kelley R. Taylor Last updated