The U.S. Supreme Court today decided not to hear an appeal of a Washington state Supreme Court ruling from March 2023 that found a statewide tax on capital gains to be lawful.
Opponents to the tax had argued that it was functionally an income tax and therefore a violation of the state constitution’s strict rules on these taxes, while supporters said it operated as a sales tax and was therefore legal. The state’s justices had ruled 7-2 in favor of supporters.
The tax sparked controversy within the tech industry because it targets stocks, a key part of compensation for many startup founders and their employees.
The tax went into effect in 2022 and brought in nearly $900 million last year, greatly exceeding original projections. The first $500 million collected goes toward education and child care programs, while the remainder is designated for school construction projects.
The law imposes a 7% tax on capital gains of more than $250,000 from the sale of stocks and bonds, excluding revenue from real estate and retirement accounts, among other exceptions.
It’s the first tax of its type in Washington history. Most states have a capital gains tax, in addition to federal capital gains taxes.
The U.S. Supreme Court justices did not provide an explanation for their decision, Bloomberg Tax reported.
University of Washington law professor Hugh Spitzer had not expected the court to take up the issue.
“I don’t see why the U.S. Supreme Court would bother,” Spitzer told GeekWire in August. “This is a state law issue, and the federal courts stay out of interpretation of state law.”
Opponents have been pursuing an alternate path to nixing the tax. Let’s Go Washington is backing an initiative for the November 2024 ballot that would eliminate what they’re calling a “stealth income tax.” The group said in December it had turned in more than 430,000 signatures to the Secretary of State’s office to get the measure on the ballot.
Supporters of the tax cheered the news from the U.S. Supreme Court.
“Polls show Washingtonians strongly support making the wealthiest pay what they truly owe in taxes for services all of us depend on. When the wealthy pay what they owe, just like the rest of us, our communities are stronger,” said Treasure Mackley, executive director of Invest in WA Now, in a statement.
Opponents of the measure, which was passed by lawmakers in 2021, argue that the tax will make Washington less desirable for entrepreneurs.
“Washington state’s constitution and its last 100 years of economic success have the same foundation: keeping our state income tax at zero preserves our economic growth, jobs, and opportunities for families. The last thing we need to do is send our innovators and investors to Texas and Florida,” said Michael Gallagher, president and CEO of Washington Policy Center, a conservative think tank.
Washington has no personal or corporate income tax and generates most of its revenue through sales, property, and business and occupation (B&O) taxes. Critics say this regressive approach to taxation hits low-income individuals and households hardest.
Schools around the state are struggling to fund education. Seattle Public Schools, for example, faces a $105 million budget shortfall for the 2024-25 school year.
