When Is Income Not Income?
When the Washington state Supreme Court says it’s not.
But in 2021, the [Washington] state legislature ignored the plain language of the constitution, plus decades of precedent, to impose a special 7 percent tax on one type of income, capital gains. That blows through the constitutional strictures in two ways.
First, as we pretty much all learned in first grade if not earlier, seven is greater than one. Second, because the tax is on the part of a capital gain that is above $250,000, it’s not uniform. So you would think the state’s Supreme Court would easily bat down that tax. If so, you would be wrong. On March 24, the Supreme Court voted, by a lop-sided 7-2 margin, to uphold the constitutionality of the tax.
How did the seven justices—I use that word loosely—justify their decision? Simple. They claimed that a tax on income was really an excise tax. Debra L. Stephens, one of the justices, wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”
Excuse me? If it were an excise tax, it would be levied on the sale of an asset. But the plain language of the law that the justices upheld says that it’s levied on capital gains.
This is from my latest piece for the Institute for Policy Innovation, “When Is Income Not Income?” TaxBytes, April 27, 2023.
Read the whole thing, which is not long.