Washington Policy Center today joined a National Tax Economists and Policy Analysts capital gains income tax amicus brief. Also joining the brief are National Taxpayers Union Foundation, Tax Foundation, and several academic experts. A motion to the state Supreme Court explained why the brief should be accepted:

“Collectively, Amici have decades of experience in tax and economic policy. They will provide this Court with a holistic view of the difference between excise taxes and income taxes in case law and economic impact. They bring together knowledge of how other jurisdictions define these key terms and what the expectation of legislative use of the terms means for citizens that is distinct from the parties’ briefing in this case. This team of tax economists and policy analysts provided key help to the Court below, even earning divided argument time to help define the terms of art. They offer the same expertise to this Court through this filing.”

Here are some of the pull quotes from the National Tax Economists and Policy Analysts brief filed today:

• “For almost 100 years, income taxes have been unconstitutional in the state of Washington. Ballot measures to allow for an income tax have been rejected by voters in 1934, 1936, 1938, 1942, 1944, 1970, 1973, 1975, 1982, and 2010. To circumnavigate this constitutional command, the legislature in 2021 imposed what it calls an excise tax on capital gains income. Respondents challenged this as an income-tax-in-disguise. The Superior Court below determined this tax to be an income tax and thus unconstitutional.”
   
• “This is not just a matter of semantics. Taxes that are mislabeled violate transparency by depriving taxpayers of information needed to make meaningful choices about policy. A good tax system is one where taxpayers easily understand what a tax is and how it operates, and subterfuge about these matters prevents that.”
   
• “The definition of ‘income tax’ or ‘excise tax,’ or how an excise tax inherently operates, are not mere differences of state rules. Words have meaning. Washington’s Legislature may call this tax an excise tax, but because it operates like an income tax, it is an income tax and all the applicable taxpayer protections relevant to income taxes should apply.”
   
• “Taxes on capital gains are taxes on income. Excise taxes do not have exemption levels, nor are they imposed on annual totals, nor do they track the filing deadlines and requirements of the federal income tax. Income taxes do all those things. Washington taxpayers will fill out a return due the same day as the federal income tax, and the base of the tax will be derived from capital gains taxed under the federal income tax and state income taxes. The IRS joins every state and every tax expert in agreeing that capital gains are income.”
   
• “The Washington capital gains tax is imposed directly on people who bear the economic incidence of the tax, as is the case with income taxes and not with excise taxes. The vast majority of excise taxes are imposed on producers or businesses that sell selected taxed products or services and collect the tax and pass it forward to their customers who bear the ultimate economic burden, which is what makes excise taxes indirect.”
   
• “The Washington capital gains tax is not a per unit consumption tax on individual transactions but on the aggregate total income itself, measured as a percentage of income and imposed broadly on all economic gains. The tax includes exemptions and deductions to limit the scope of the tax to certain individuals, rather than applying universally to an activity. The tax is not based on a transaction, but on the net aggregate capital gains earned by a person in a year. These are all features of income taxes, not excise taxes.”
   
• “The primary justification for the capital gains tax offered by the legislators is to increase progressivity, which is a strong indication that this tax is not an excise tax.  Excise taxes are generally regressive and income taxes are generally progressive, a fact understood as early as 1937 when the Roosevelt Administration sought to boost progressivity by reducing excise taxes and increasing income taxes on high-earners.”
   
• “The Washington capital gains tax is an income tax, not an excise tax. To the extent Washington’s Constitution or precedents preclude a graduated non-uniform income tax, this tax should be precluded.”

This is what the actual text of RCW 82.87 says (emphasis added):

• “Beginning January 1, 2022, an excise tax is imposed on the sale or exchange of long-term capital assets. Only individuals are subject to payment of the tax, which equals seven percent multiplied by an individual's Washington capital gains.”
   
• "’Washington capital gains’ means an individual's adjusted capital gain . . . “
   
• “’Adjusted capital gain’ means federal net long-term capital gain . . .”
   
• "’Federal net long-term capital gain’ means the net long-term capital gain reportable for federal income tax purposes . . .”

For those that were able to follow this definitional bouncing ball, you see that the tax is imposed on the capital gains income reported for federal income tax purposes. This is why the state requires those that are subject to the capital gains income tax to submit a copy of their federal income tax return.

Hopefully, after reading the National Tax Economists and Policy Analysts amicus the State Supreme Court will clearly understand why the IRS unequivocally says:

“You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such.”

The state Supreme Court will hear oral arguments on the capital gains income tax on January 26, 2023. Additional amicus briefs will be available by tomorrow.

Additional Information
Former IRS attorney “dumbfounded” by Washington’s capital gains income tax arguments
UW Tax Law Professor on new capital gains income tax: “It’s going to be found unconstitutional”
Capital gains income tax interview with University of Washington tax expert Professor Schumacher
Capital gains income tax quotes – who said it?