Tomorrow, the Washington Supreme Court will hear oral arguments from the Attorney General and a bunch of wealthy conservatives on the legality of our state’s power to tax the rich.
A decision in favor of the whiny rich people who sued the state over the new capital gains tax would put us in a world of financial trouble. A decision in favor of the state could pave the way for Washington to finally make the wealthy pay their fair share to fund our education system. A really cool decision in favor of the state could give lawmakers the opportunity to create an entirely new—and much fairer—tax system.
We don't know exactly when the Court will make its decision—though we know it'll be a Thursday—but we do know that they basically have those idiotic, cowardly, and truly based options.
The Idiotic Approach: Stick with the Trial Court
Why does taxing these ~8,000 rich people stir up a legal controversy in the first place? Because, for nearly a hundred years, prior rulings from a slim, anti-tax majority on the Court have classified income as “property.” Washington’s constitution limits taxes on property to a maximum of 1% and requires the state to tax it uniformly, which effectively prevents us from taxing the rich more than the working class.
Last year, the State Legislature finally passed a 7% tax on capital gains, which are profits from selling stocks and other financial assets, to pay for education. That tax applies to profits over $250,000 after certain exemptions, such as profits from selling a family home or small business.
Rich people then sued, claiming that their gains were income and therefore, according to the constitution, property, which would render the 7% tax and other provisions in the new law unconstitutional. A trial court judge in Douglas County then agreed with that reasoning, but the Attorney General’s office appealed.
Arguing on behalf of the state, the AG says that the capital gains tax is actually an “excise tax” and therefore compliant with the constitution.
Excise taxes are levied on transactions, like when you pay sales tax on your purchases at the grocery store. By contrast, the government collects income taxes and property taxes annually. Because the trigger for the capital gains tax is the sale of an asset, the State Legislature called the capital gains tax an excise tax.
The trial court judge disagreed, arguing that the capital gains tax contained several “hallmarks” of an income tax. For instance, like an income tax, the state collects the capital gains tax annually rather than at the time of the transaction. Like an income tax, the state uses federal income tax forms to figure out how much someone owes on their capital gains taxes. And, like the income tax, the state offers a charitable giving deduction on the capital gains.
That reasoning sounds kinda smart, but it simply doesn’t track with how excise taxes work in Washington state, as the Attorney General’s office argues in its brief to the Supreme Court.
For example, the state uses federal income tax forms to simplify the collection of estate taxes, which people pay when they inherit a bunch of money. The state allows a charitable giving deduction for that tax, too. And yet, the courts have upheld the estate tax as a valid excise tax.
Washington’s sales tax, which is the textbook example of an excise tax, also operates like the capital gains tax. While customers are charged sales tax at the time of each transaction, the government collects it from retailers on a periodic basis–just like the capital gains tax. Also, the State Legislature exempts certain products, like vegetables and other groceries, from the sales tax just like they exempt the profits from selling a family business from the capital gains tax.
Agreeing with the trial court and striking down the capital gains tax would ignore those flaws in the judge’s reasoning and deprive the state of an estimated $500 million that the Legislature has earmarked for funding Washington’s schools and badly underfunded child care system. For a bunch of justices who have to stand for statewide election to keep their jobs, that doesn’t seem smart.
The Coward’s Way Out: Agree with the Attorney General
While helping the super-rich take money away from kids and working parents would probably earn some backlash at the ballot box, paving the way for a broader progressive income tax could also backfire for the justices the next time they run for reelection. Lucky for them, the Attorney General’s office has given them a way out of that sticky wicket.
In their briefs, the Attorney General’s lawyers argue that there’s enough similarity between the capital gains tax and other excise taxes, such as the sales tax and the estate tax, for the Court to avoid dealing with the concept of whether income is actually property. They contend that the capital gains tax isn’t a tax on income but rather a tax on the use of someone’s property to generate income, and therefore it meets the definition of an excise tax.
Legal experts on tax policy in Washington state agree with that analysis.
At a press conference last week, attorney Howard Goodfriend said the group of law professors he represents studied capital gains and excise taxes in states across the country and concluded that nearly every other government treats their capital gains tax as an excise tax. Goodfriend added that his clients think that “the Supreme Court is going to recognize that the Legislature has broad authority to devise transactional taxes to fund its citizens’ basic needs.”
Taking this path would preserve the $500 million the capital gains tax would bring in to fund education, but it wouldn’t solve Washington’s more foundational problem of not having the authority to enact a progressive income tax. Plus, it’s still possible that the ruling pisses off the mega-rich enough to use some of their massive wealth to fund attack ads against the justices who vote to uphold the tax the next time they run for office.
The Bold (and Correct) Path: Legalize Income Taxes
As the conservatives on the US Supreme Court showed us last summer when they repealed Roe v. Wade, the law is simply what the highest court in a given place says it is. And while it’s probably not necessary for our Supreme Court to overrule the outdated cases that functionally prohibit a state income tax, they should take the chance in front of them to do so–especially considering that taking the coward’s way out won’t save them from rich-guy super PAC ads anyway.
After all, those prior decisions have forced Washington to overly rely on sales and property taxes, which makes us the state where poor people pay the most of their income in taxes compared to rich people. That leads to horrible outcomes, like people living on fixed incomes having to choose between paying absurdly high property taxes or paying for their prescriptions.
But won’t fixing our tax code so that rich people actually pay what they should to fund our schools and social services make them flee the state? At a press conference last week, Andy Nicholas of the Washington Budget & Policy Center said that favorite refrain of the rich and their bootlickers has been “thoroughly studied and debunked.”
“Interstate migration is much more driven by housing costs, good schools, and high quality parks–all things that taxes actually pay for,” Nicholas said.
Still, people hoping for a display of courage and principle from the Supreme Court shouldn’t hold their breath. Hugh Spitzer, a constitutional law professor at the University of Washington who has studied the constitutionality of income taxes in Washington for more than 20 years, expressed pessimism that the Court would overturn the ruling that outlaws income taxes.
“I would be thrilled if the Supreme Court overturns the 1933 case and says an income tax is constitutional,” Spitzer said at a press conference last week. “My guess is they’re not gonna do it.”