U.S. Supreme Court declines to hear Washington's capital gains tax case

The U.S. Supreme Court declined to hear arguments in a case challenging the constitutionality of Washington's capital gains tax that took effect two years ago.

In Quinn v. Washington, plaintiff Chris Quinn asked the high court to review and overturn the Washington State Supreme Court's 7-2 March ruling that upheld the tax.

The high court rejected the hearing request on Tuesday.

Approved by lawmakers in 2021, the law moves the state, which does not have a personal or corporate income tax, toward a more progressive tax structure. Opponents have argued that capital gains should be treated as income and be subject to property tax laws, which are limited to 1% by the state constitution, which would prohibit collecting the 7% capital gains tax. The state's high court upheld the tax as a legal excise tax.

Bloomberg News

The 7% tax on profits gained from the sale or exchange of stocks, bonds or other investments above $250,000, has brought in $896 million in revenue, according to the Washington State Department of Revenue. The first payments on the tax were collected in April 2023, off the law that took effect January 2022. Up to $500 million funds education operations, and anything over that goes toward school construction.

Supporters lauded the decision.

"The U.S. Supreme Court's decision was a huge victory for Washington kids and families," Treasure Mackley, executive director of Investment in Washington Now, a non-profit advocating for changes to the state's tax code, said in a statement. "It preserved $900 million a year to support Washington's childcare and education programs, far more than was initially projected to be collected from this tax."

He added the decision "could not have come at a more critical time as school districts across the state are facing funding shortfalls." 

The capital gains tax increases funding for the Education Legacy Trust Account, which supports childcare, pre-schools, special education, and community and technical colleges; it also funds the Common School Construction Account, which helps with renovating, repairing, and building schools, according to the advocacy group.

Detractors will not fade away with the high court decision, because a conservative group called Let's Go Washington is gathering signatures to place a measure on the ballot to repeal it.

The Building Industry Association of Washington was among trade groups including the Washington Retail Association that supported Quinn in his opposition to the tax.

"We are disappointed the court failed to recognize the devastating financial impact this decision will have on Washington businesses and individuals.," Ashli Tagoai, BIAW's general counsel said in a statement. "Every jurisdiction in our nation taxes capital gains as income, and rightfully recognizes a capital gains tax as an income tax. Now, Washington is the sole exception."

He added that the disparity of capital gains treatment complicates bookkeeping and adds to the administrative complexity of interjurisdictional business and discourages commerce.

"We fully support repealing this tax either in the legislature or at the ballot box," Tagoai said.

Let's Go Washington has gathered more than 430,000 signatures for I-2109, a ballot initiative that would repeal the tax, according to the BIAW. If the secretary of state certifies the initiative, it could be placed on the November 2024 ballot.