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.
READER COMMENTS
vince
Apr 29 2023 at 1:02pm
An excise tax includes a tax imposed on a privilege. I suppose if you had the privilege of receiving income from a large capital gain, you could be subject to an excise tax on it. Not on the income, of course. On the privilege.
As Bastiat wrote: The law perverted! … not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed!
vince
Apr 29 2023 at 1:07pm
Truly incredible: 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.”
It’s not a tax on the gain from a capital asset, it’s just a tax measured on the gain from a capital asset.
Monte
Apr 29 2023 at 3:48pm
The decision rendered by the court made zero sense to me, too, until I read this:
Justice Stephens (I, too, use the word lightly) must have purchased and read the book, The Whiteness of Wealth: How the Tax System Impoverishes Black Americans–and How We Can Fix It.
Too bad she ignored reading the following critical review on Amazon before falling prey to white guilt. A couple of slices:
MarkW
Apr 29 2023 at 5:43pm
So I guess there’s nothing to prevent the legislature from adopting an income tax except for fear of voters’ wrath. Given how far left WA is now, I wonder if that’s still a problem or if they’ll just go ahead and do it?
Todd Ramsey
Apr 30 2023 at 11:37am
More When is Income not Income from Washington:
Since 2019, Washington has instituted a tax on wages up to the Social Security maximum (currently 0.8%, up from 0.4% in 2019), ostensibly for Paid Family and Medical Leave, AND a 0.58% tax on all wages, ostensibly for Long-Term Care insurance.
Any guess whether these rates will remain stable over the long term? I’ll take the over.
Look for Washington to join other blue states watching their jobs and income flee to more income tax-friendly states.
David Henderson
Apr 30 2023 at 1:54pm
Wow, Todd! I did not know this. Thank you for pointing it out.
steve
May 1 2023 at 11:14am
So all capital gains should be taxed as income and subject to income tax?
Steve
David Henderson
May 1 2023 at 11:56am
I’m not sure whom you’re asking or why you’re asking, but my answer is no.
Peter Soehnlen
May 13 2023 at 8:42pm
INCOME includes all profits and gains from whatever source derived and, all income within most of states and the nation can be taxed at whatever rate the Congress of the United States or the Legislatures in those states choose.
The 7% rate is irrelevant, as is the $250k exemption. Uniformity is achieved through the universal application as defined in the statute, in this instance the whole of the State of Washington.
Decades ago it was explained to me by a professor of Federal Taxation how the meaning of INCOME was among the most difficult of legal concepts for students of the law to grasp.
Seems little has changed as to the ability to comprehend the meaning.
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