Washington Policy Center and Opportunity for All Coalition have filed an amicus brief supporting the petition to the United States Supreme Court to review the Washington State Supreme Court ruling upholding the capital gains excise tax. 

Additional organizations joining the brief include Americans for Tax Reform, California Policy Center, Grassroot Institute of Hawaii, Illinois Policy Institute, Independence Institute, National Taxpayers Union Foundation, Manhattan Institute for Policy Research, Mountain States Policy Center, Oklahoma State Chamber Research Foundation, Reason Foundation, and the Tax Foundation. 

Washington’s decision to tax out-of-state transactions by way of an excise scheme to avoid constitutional limitations on income taxes has created conflict with the Commerce Clause. As noted in the brief:

“The Washington Supreme Court’s decision threatens to unsettle numerous limitations on the scope of states’ taxing power and thereby prompt other states to follow Washington’s lead, when it suits their own purposes. If Washington can lay an excise on out-of-state sales of capital assets involving only out-of-state property, may California impose a gas tax on gasoline purchases in Arizona? May Texas impose an excise tax on stock sales in New York? May Pennsylvania impose a sales tax on grocery store checkouts in Ohio? Straightforward and long-standing principles of federalism dictate that the answer to all these questions should be no. But if this Court does not review Washington’s claimed authority to impose an excise tax with extraterritorial effect, other states will surely follow Washington’s lead and enact novel excise taxes of their own.”

The briefing outlines three reasons why this petition should be granted, and the law overturned. 

The first is Constitutional limits on state taxes for interstate taxes. This territorial limitation on state power is core to interstate commerce and creates a level playing field for state economies. This limitation allows states to regulate and tax within their own borders without interfering with neighboring states and vice versa. 

“A healthy system of interstate competition cannot function if states overstep their boundaries. Without question, states have wide latitude to craft economic regulations, pursue differing market policies, and establish varying tax structures that, in their view, best attract business and talent from the rest of the country to their state. But in exercising their prerogative to structure their tax system as they see fit, states must respect the territorial limits on their power and not encroach on the sovereign domain of other states.”

The second argument focuses on the Washington State Supreme Court’s decision contravening foundational principles of federalism. While an income tax on state resident’s income from out-of-state transactions would be permissible, taxing an out-of-state transaction would not be under the commerce clause. The problem with the underlying legislation is that it is written expressly as an excise tax on out-of-state transactions to avoid Washington State’s Constitutional restriction on progressive taxing of property (income is defined as property). 

The final reason made in the briefing is allowing this ruling to stand throws off the balance between states and creates chaos in interstate relations. 

“By offering a roadmap for states to shift their costs onto other states, the Washington Supreme Court’s decision compromises interstate competition, state autonomy and democracy, and undermines the Constitution’s strong interstate territoriality principles that guard against exactly these distorted incentives. And a rule that a state’s power to impose excise taxes attaches to out-of-state transactions and out-of-state property solely by virtue of the residency of the taxpayer could soon give rise to states’ efforts to regulate the out-of-state conduct of their residents—further eroding the core territoriality constraints on state authority.”

You can read the filed brief here. Additional information on the Washington State capital gains tax can be found here.