By Huey Long
Quinn v. State, No. 100769-8 (Mar. 24, 2023). Washington’s highest court recently addressed whether the newly-enacted capital gains tax presents an unlawful tax on income. The Court held the tax to be a permissible excise because it will be levied on the sale or exchange of capital assets, not on capital assets or gains themselves. Before you complain the ruling is political, not based in law, dictionary definitions, or common sense, and shows the dangers attendant to the judicial branch’s trespassing clumsily into the political field, consider: unlike recent mystifying decisions from the U.S. Supreme Court, the majority here simply confirmed the legislative branch’s power to make findings, enact legislation, and tax residents.
Now, I contend my friends, we have no difficult problem to solve in America, and that is the view of nearly everyone with whom I have discussed the matter here in Washington and elsewhere throughout the United States — we have no very difficult problem to solve. It is not the difficulty of the problem which we have; it is the fact that the rich people of this country — and by rich people I mean the super-rich — will not allow us to solve the problems, or rather, the one little problem that is afflicting this country — and I don’t mean the pernicious Donald, or Americans’ lack of consideration for others, or the opiate that is the smartphone in your clammy palm at this very moment — although those are all symptoms of disease. In order to cure all of our woes, it is necessary to scale down the big fortunes, that we may scatter the wealth to be shared by all of the people.
I can read your lips as you mouth, “Socialist!” Communist. Parasite. Leveler. I’ve heard it all. But we do not propose to divide wealth equally. No, Sir. We do not propose a division of wealth, but we propose to limit poverty that we will allow to inflict any Washington family. We will not say we are trying to guarantee any equality. No; but we do believe in equity; enough for home, the ordinary conveniences, and the opportunity to educate children; a fair share of the income of this land so there will be no such thing as merely the select who have those things, and so there will be no such thing as a Washington family living in poverty and distress.
So how does Quinn fit into all this? Well, pursuant to recently-enacted legislation, Washington will impose a 7% capital gains tax on the sale or exchange of certain long-term capital assets.1 Unsurprisingly, the super-rich who hold qualifying capital assets filed suit against the state. They characterized the excise as an income tax, inviting the oracles to announce our sacred, vestal Constitution has been violated. Let’s be certain about one thing: there is nothing lofty or sacrosanct about a constitutional ban on income tax.
Washington’s tax scheme is one of the most, if not the most, regressive in the nation. Unlike most other states, there is no state personal or corporate income tax. Instead, tax revenue is generated primarily through sales, property, and B&O taxes.2 “The poorest individuals bear the greatest tax burden due in large part to our heavy reliance on sales taxes and the lack of a graduated income tax, with low wage earners paying nearly six times more in state taxes as a percentage of personal income than Washington’s wealthiest residents.”3 “This burden falls disproportionately on Black, Indigenous, and People of Color (BIPOC), who are overrepresented in low income brackets.”4 “As a result, Washington’s upside-down tax system perpetuates systemic racism by placing a disproportionate tax burden on BIPOC residents.”5
See? You get it.
So, Washington’s Legislature enacted Engrossed Substitute Senate Bill 5096, which imposes a 7% tax on the sale or exchange of certain long-term capital assets beginning January 1, 2022.6 The Legislature found, “it is the paramount duty of the state to [] provide every child in the state with an education,” and, “high quality early learning and child care is critical to a child’s success in school and life.”7 Further, “Washington’s tax system today is the most regressive in the nation because it asks those making the least to pay the most as a percentage of their income.”8
That excise revenue will be used for public education. “The first $500 million collected from the tax each year will be deposited into the education legacy trust account, which supports K-12 education, expands access to higher education, and provides funding for early learning and child care programs.”9 All annual revenue in excess of $500 million will be used to help build facilities for common schools.10
The capital gains tax contains numerous exemptions and deductions, including for transactions involving real estate, retirement accounts, agriculture, certain family-owned businesses, and charitable donations;11 and it applies only to individuals,12 to the sale or exchange of capital assets held for at least one year,13 and to nonexempt long-term capital gains which exceed $250,000.14
Nevertheless, Plaintiffs cited three separate grounds to invalidate the tax on its face: (1) the uniformity and levy limitations on property taxes set forth in article VII, sections 1 and 2 of Washington’s Constitution; (2) the same Constitution’s privileges and immunities clause; and (3) the U.S. Constitution’s dormant commerce clause. Rest assured, the majority of justices were not persuaded.
The capital gains tax is a valid excise tax. Article VII, section 1 requires all taxes to “be uniform upon the same class of property.” Section 2 states, “the aggregate of all tax levies upon real and personal property . . . shall not in any year exceed one per centum of the true and fair value of such property in money.” Those requirements apply only to property taxes, however, and not to excise taxes.15
Rather than a tax on the mere ownership of property, an “‘excise tax’ applies to the exercise of rights in and to property or the exercise of a privilege.”16 Here, “the capital gains tax is an excise tax because taxpayers do not owe the capital gains tax merely by virtue of owning capital assets or capital gains, like a property tax.”17 The tax applies only when qualifying long-term capital assets are sold or exchanged; i.e., an excise.
Nor is this a tax on income because it does not relate broadly to net income but instead applies to qualifying transactions resulting in substantial gains. Think of the real estate and rental excises; each involves taxes measured by consideration from real estate sales or rentals. Washington law holds those taxes to be excises because they apply to transactions. Plaintiffs argued the taxable incident is not the transaction per se but the realization of capital gains. “The tax,” however, “is not levied on capital gains; rather, it is measured by capital gains.”18
Because the capital gains tax is an excise, it is not subject to the uniformity and levy requirements of article VII.
The capital gains tax does not violate the privileges and immunities clause of Washington’s Constitution. “No law shall be passed granting to any citizen, class of citizens, or corporation other than municipal, privileges or immunities which upon the same terms shall not equally belong to all citizens, or corporations.”19 Where a challenged law implicates a fundamental right of state citizenship, courts “conduct an independent state constitutional analysis[:] whether the challenged law grants a privilege or immunity and, if so, whether there is a reasonable ground for granting that immunity.”20
Washington’s Legislature has broad discretion to make classifications for taxation purposes. Contrary to Plaintiffs’ novel argument, there is no fundamental right to be exempt from taxes which do not apply to other Washingtonians. This was a good try, though, right? Eyman-as-law-student vibes. But even if the Court were to recognize such a “fundamental right,” the tax would not be void under article I, section 12 because there are facts reasonably-
conceived to sustain the classification.21
“[T]he equalization of the burdens of taxation” is a “lawful taxing policy of the state.”22 Funding “public education is plainly a lawful taxing purpose, indeed it is the State’s ‘paramount duty.’”23 This capital gains “tax will generate substantial new revenue for public education without exacerbating existing inequities as between individuals by requiring Washington’s wealthiest to pay a greater share of their overall income in state taxes.”24
Because there is no fundamental right at issue and, even if there were, a reasonable basis exists to sustain the tax classifications, the Court held the tax does not violate the privileges and immunity clause of the state Constitution.
The capital gains tax does not violate the Dormant Commerce Clause of the United States Constitution. The commerce clause grants Congress the power to “regulate commerce . . . among the several states.”25 The U.S. Supreme Court has held the “Dormant Commerce Clause” prohibits “certain state taxation even when Congress has failed to legislate on the subject.”26
Under current precedent — one never knows about precedent these days — a four-part test should determine whether a state tax is permissible under the Dormant Commerce Clause.27 The tax must be (1) applied to an activity with a substantial nexus with the taxing state, (2) fairly apportioned, (3) nondiscriminatory with respect to interstate commerce, and (4) fairly related to the services provided by the state.
The parties disputed whether capital gains derived from the sale or exchange of intangible property or tangible property located out-of-state at the time of the transaction but owned by a taxpayer domiciled in-state would violate the first, second, or third prong.
Under the first prong, a taxpayer’s domicile state has tax jurisdiction over the sale or exchange of intangible goods.28 Plus, a substantial nexus exists to support Washington’s taxation of capital gains derived from the sale or exchange of tangible property located out-of-state because the taxable incident is the taxpayer’s exercise of the power to dispose of capital assets and that power is exercised in the state where the taxpayer is domiciled.29
The second prong asks whether the tax is fairly apportioned. Courts ask whether the tax is internally consistent; if so, is it externally consistent as well?30 Internal consistency looks to the structure of the tax rather than economic reality.31 “The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed.”32 The majority held the capital gains tax to be both internally and externally consistent.
As to the third prong, the majority held the capital gains tax does not discriminate against interstate commerce; “it is not facially discriminatory because the plain text of the statute does not treat out-of-state individuals unfavorably[,]” and it “does not subject an individual to multiple taxation because it provides a method for allocating capital gains to Washington and the tax credit removes any risk of actual multiple taxation.”33
In summary, a majority of Washington Supreme Court justices confirmed the legislative branch’s ability to tax qualifying capital gains. Folks, this is how judicial review is supposed to work.
Share our wealth. I am delighted to say, capital gains of the super-rich will fund the public education of Washington children. This is but one of the things we propose to do. Everyone a king. Everyone to eat when there is something to eat; all to wear something when there is something to wear; all to be sheltered when there is shelter; and all to learn when there are things to learn.34 That makes us all sovereign. Should the super-rich decide to leave Washington rather than pay their fair share, well, so long and salut!
1 Revised Code of Washington, Ch. 82.87.
2 See INST. ON TAX’N & ECON. POL’Y, WHO PAYS? A DISTRIBUTIONAL ANALYSIS OF THE TAX SYSTEMS IN ALL 50 STATES 127 (6th ed. 2018) (“ITEP”), https://www.itep.sf02.digitaloceanspaces.
com/whopays-ITEP-2018.pdf [https://perma.cc/E6GN-U29Z].
3 Op. (citing ITEP at 126).
4 Op. (citing, e.g., WASH. FUTURE FUND COMM., A REPORT TO THE LEGISLATURE 17 (2022), https://www.tre.wa.gov/wp-content/uploads/
2022-WFF-Committee-Report_Submitted-11.30.22.pdf [https://perma.cc/7QFG-3BNX].
5 Op.
