Second lawsuit filed seeking to invalidate capital gains tax

Jay Inslee
Ted S. Warren

Washington Gov. Jay Inslee speaks before signing a bill into law in Tukwila, Wash., Tuesday, May 4, 2021, that levies a new capital gains tax on high profit stocks, bonds and other assets for some residents of Washington state.

SEATTLE (AP) — Former Washington Attorney General Rob McKenna has filed a lawsuit seeking to strike down the state’s new capital gains tax, arguing it is an illegal income tax.

The lawsuit, filed Thursday in Douglas County Superior Court, was brought on behalf of state residents including manufacturing business owners, investors, and the Washington State Farm Bureau, The Seattle Times reported.

Democrats who hold majorities in the state Legislature this year passed a capital-gains tax meant for the state’s wealthiest residents. The new tax would be paid by fewer than 1% of state taxpayers.

The measure adds a 7% tax on capital gains above $250,000 a year, such as profits from stocks or business sales. It would raise an estimated $445 million a year, starting in 2023.

The Legislature called the new tax an “excise tax” on “the sale or exchange of certain capital assets” — not an income tax. But the lawsuit argues that every taxing authority in the country, including the IRS and all other state revenue departments, agrees that capital gains are income.

The lawsuit also cites a history of decision by courts and voters rejecting income taxes in Washington.

Supporters of the tax, including education and child care advocates, denounced the lawsuit as an attempt to protect the state’s wealthiest residents from paying their fair share.

The lawsuit is the second one challenging the tax. The Freedom Foundation, an Olympia-based conservative think tank, filed a lawsuit in April.

McKenna said he expects the two lawsuits will be combined and considered together by courts.

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READ: Lawsuit filed to block new Washington capital gains tax