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Ruling on capital gains tax lawsuits expected next week

It’s not really a question of if Washington’s capital gains tax will end up in front of the state Supreme Court, only a matter of when. A pair of lawsuits spearheaded by former Attorney General Rob McKenna are right now the most likely vehicle to get there.

Douglas County Superior Court Judge Brian Huber is presiding over the twin legal challenges to Washington State’s capital gains tax. Passed by the Legislature last session, it levies a 7%tax on long-term capital gains in excess of $250,000. However, profits from the sale of real property are exempt.

During a hearing on Aug. 18, which pitted McKenna against current Attorney General Bob Ferguson’s staff, Huber gave the two sides another week to submit additional briefings. Huber will rule on whether the cases should be dismissed, moved to Thurston County, or allowed to proceed sometime next week. 

Neither side’s attorneys are under the illusion that this decision will be the end of the road for litigation on the capital gains tax. Noah Purcell, representing the state, put it bluntly:

“There’s no question that this statute will be in court soon, and the constitutionality of this tax will be litigated fully … and we fully expect to prevail.” 

The state’s argument for dismissal goes like this: in order to file for damages like the plaintiffs are doing, they need to demonstrate real hardships. Since the tax hasn’t gone into effect yet, there’s no impact. 

But arguing the opposite side, McKenna said that while the tax isn’t being collected yet, it will be. 

“It is an absolute certainty that unless enjoined, the state will enforce the statute,” he said. 

He claims that his clients are essentially guaranteed to suffer financial costs due to the capital gains tax, as evidenced by the state projecting it will raise $500 million a year in revenue from it. 

The state’s attorneys also requested a venue change to Thurston County. Allison Foreman, attorney for the Farm Associates challenging the tax, argued that Douglas County was a better venue for the lawsuits for now, and closer to farmers. But she noted that the case was likely to wind up in Olympia eventually. 

Five Washington cities have passed ordinances banning local income taxes, likely over concerns that the capital gains tax could precede a push for an income tax.

Washington State’s Supreme Court ruled against an income tax in the 1930s. The tax was initially approved by a large margin of voters in 1932, but the Supreme Court decision coupled with restrictions on property taxes effectively ended the state’s income tax. Voters have rejected measures to create one since then. The state has the most regressive tax scheme in the nation — meaning lower-income people are paying a far greater share of their earnings in taxes than the wealthy — but lawmakers are at odds over how to create a fairer tax system. 

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