Conservatives hopeful for Supreme Court action on capital gains tax case

Just months after the Washington Supreme Court ruled that a capital gains tax enacted by the state is constitutional, one anti-tax group awaits a decision from the nation’s highest court on whether to hear its case. 

The capital gains tax in question is a 7% tax "on any gain in excess of $250,000 in a calendar year from the sale or exchange of certain long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets," according to the Washington Department of Revenue. 

The Freedom Foundation, a conservative think tank that "promotes free markets and limited, accountable government," is hoping the U.S. Supreme Court will take up their appeal to have the tax overturned. 

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"Washington’s liberals in every branch of government have long lamented the absence of an income tax in the state and sought ways to generate additional revenue by taxing high earners at a higher rate than those earning less," the group said in a press release. 

In August, the organization filed a petition for certiorari asking the court to hear its appeal in Quinn v. Washington, arguing that not only was the capital gains tax unconstitutional, but also had federal implications.

It comes after the Washington state Supreme Court, in a 7-2 decision, overturned a 2022 Superior Court ruling "siding with the Freedom Foundation’s assertion that the new tax violated requirements in the state constitution that property and income taxes be assessed uniformly."

Washington state Supreme Court Justice Debra Stephens, writing in the majority opinion, stated, "The capital gains tax is appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves."

"This understanding of the tax is consistent with a long line of precedent recognizing excise taxes as those levied on the exercise of rights associated with property ownership, such as the power to sell or exchange property, in contrast to property taxes levied on property itself," she continued. 

Critics say this new precedent, if upheld, could open the door to politicians taxing out-of-state transactions. 

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"For big government politicians who are hemorrhaging taxpayers to other states, the authority to tax out-of-state transactions is a dream come true," said Brian Minnich, executive vice president of the Freedom Foundation.

To date, returns released by the Washington Department of Revenue indicate the state collected almost $850 million from the capital gains tax this fiscal year, more than three times the projection of around $250 million.

After the state Supreme Court ruling in March, Democratic Gov. Jay Inslee celebrated the decision. 

"For 134 years, Washington state has been waiting for the day when a fairer tax system came about, one where working people were not carrying an inequitable share of the burden," Inslee stated. 

"Today is that day. 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," he added. 

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For now, conservative organizations like the Freedom Foundation say they will continue to fight, especially as residents in high-tax blue states leave for lower-tax red states.

"This feeding frenzy of taxes will quickly become a nightmare for America's taxpayers and undermine our entire system of federalism unless the Supreme Court acts to restore the Constitution's interstate commerce clause," Minnich concluded.