Attorney General: Capital gains tax is an "excise tax"

We can now add the Attorney General’s Office to the list of state officials apparently ignoring the Douglas County Superior Court ruling that unequivocally said the capital gains tax is an unconstitutional income tax, not an excise tax. Despite this court ruling, the Attorney General (AG) referred to the capital gains tax as an “excise tax” in the language submitted for the I-1929 ballot title and summary. The I-1929 campaign told me today it is currently reviewing the AG’s ballot title and summary language to determine if it will appeal.

As a refresher, here is what the Inslee appointed Douglas County Superior Court Judge said in his ruling declaring the capital gains income tax unconstitutional:

“…some of the most significant ‘incidents’ of ESSB 5096 show the hallmarks of an income tax rather than an excise tax. They include the following:

• It relies upon federal IRS income tax returns that Washington residents must file and is thus derived from a taxpayer’s annual federal income tax reporting.

• It levies a tax on the same long-term capital gains that the IRS characterizes as ‘income’ under federal law.

• It’s levied annually (like an income tax), not at the time of each transaction (like an excise tax).

• It is levied not on the gross value of the property sold in a transaction (like an excise tax as demonstrated by the examples cited by the State), but on an individual’s net capital gain (like an income tax).

• Like an income tax, it is based on an aggregate calculation of an individual’s capital gains over the course of a year from all sources, taking into consideration various deductions and exclusions, to arrive at a single annual taxable dollar figure.

• Like an income tax, it is levied on all long-term capital gains of an individual, regardless of whether those gains were earned within Washington and thus without concern whether the State conferred any right or privilege to facilitate the underlying transfer that would entitle the State to charge an excise.

• Like an income tax and unlike an excise tax, the new tax statute includes a deduction for certain charitable donations the taxpayer has made during the tax year.

• If the legal owner of the asset who transfers title or ownership is not an individual, then the legal owner is not liable for the tax generated in connection with the transaction, unlike the excise taxes identified by the State…

ESSB 5096 is properly characterized as an income tax pursuant to Culliton, Jensen, Power and other applicable Washington caselaw, rather than as an excise tax as argued by the State.”

The judge concluded his order by saying:

“ESSB 5096 is declared unconstitutional and invalid and, therefore, is void and inoperable as a matter of law.”

So, what do the court victors think of the AG’s I-1929 ballot title calling the capital gains tax an “excise tax?”

Former Attorney General Rob McKenna (one of the plaintiff attorneys in the case) told me this morning:

“In its ruling that invalidates the new tax, the Superior Court cataloged all the tax’s features that clearly reveal it to be an unconstitutional income tax. Unfortunately, the AG Office’s ballot title and summary do not acknowledge that court ruling.”

Unfortunate indeed. No matter how far down in the sand capital gains tax supporters want to bury their heads, there is no escaping the fact that the IRS, every other state in the country, and an Inslee appointed judge all agree: A capital gains tax is an income tax, not an excise tax.

As for the current controversy, the I-1929 campaign has five days to decide on whether to pursue a ballot title appeal.

-Mercier is the Director of the Center for Government Reform at Washington Policy Center and is based in the Tri-Cities.