UW Law prof: Meaning of the “excise” key of the capital gains tax constitutionality ruling | Washington

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(The Center Square) – The Washington State Supreme Court is generally expected to decide whether the new capital gains tax is constitutional. Such a decision will likely depend on definitions, according to a Seattle law professor.

“The key question is whether the capital gains tax is an excise tax (a one-off tax on the single action of selling a security and realizing the capital gains) or whether the tax on capital gains is rather a property tax on the title itself (an asset / property tax, and therefore a property tax under the Washington constitution), ”said Hugh Spitzer, professor at Washington University Law School, in an email to The Center Square.

Scheduled to come into force on January 1, 2022, the law imposes a 7% tax on capital gains over $ 250,000 for individuals and joint filers from the sale of assets such as stocks and bonds. Exceptions include the sale of real estate, livestock and small family businesses.

“The state Supreme Court will likely base its decision entirely on the nature of the tax, based on 90 years of rulings on property taxes versus excise taxes,” Spitzer explained.

Washington state’s highest court has long ruled that income is a good as defined by the state’s constitution, effectively prohibiting a progressive income tax. In 1932, voters in Washington approved a graduated income tax with a 70% margin to pay for education.

The following year, the state Supreme Court struck down the tax in Culliton v. Chase, noting that “it would certainly defy the ingenuity of the most sophisticated lexicographer to formulate a more comprehensive definition of ‘property’ than that found in the Washington State Constitution. . “

Since then, the court has always ruled that income is property.

In a one-page decision from 1960, Apartment Operators Association of Seattle, Inc. v. Schumacher, the court said “the constitution can be changed by a vote of the people.”

Washington state voters rejected six constitutional amendments allowing for progressive income tax, as well as four income tax initiatives.

Additionally, the Internal Revenue Service and all other state tax departments recognize capital gains as income.

Spitzer pointed to two other cases that could inform any court ruling on the constitutionality of capital gains tax.

“For example, in the 1930s, the court ruled that the excise tax on motor vehicles was indeed an excise tax on the use of roads, rather than a property tax on cars,” he said. he declared.

In the case of 1937 State ex rel. Hansen vs. Salter, the state Supreme Court ruled that a motor vehicle tax, measured annually on the vehicle’s registration value, is a valid excise tax.

Spitzer also noted that “the court later ruled that the real estate excise tax is a tax on the sale of goods (an excise tax) and not a real estate tax on the property itself.”

The State Supreme Court in its 1952 decision in Mahler vs. Tremper ruled that a county tax on the sale of real estate is an excise tax and not a property tax because it is a tax on the transaction rather than just on the property.

Since the property tax is an excise tax and not an income tax, it can be graduated.

The attorney general argues that state courts should treat capital gains tax in much the same way as excise taxes, thus allowing the law to remain in effect. Opponents argue that the courts should slam the dictionary shut on this effort.


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