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The U.S. Supreme Court recently declined to consider a challenge to the Washington state capital gains tax that took effect in 2022. This decision ends the court cases and appeals that opponents of the new tax have brought since the statute was enacted in 2021.
The Washington capital gains tax is a flat 7% on long-term capital gains over $250,000 per year for both single and married joint filers. Long-term gains refer to the sale or exchange of long-term capital assets like stocks, bonds, investments, business interests and other assets held for more than one year.
There are various exceptions, such as gains from real estate and gains within qualified retirement plans, deductions for qualified family-owned small businesses and taxes paid to other states and large charitable donations. Although the tax is new to Washington state — which has never previously had an income or capital gains tax — it has already been unexpectedly successful, raising nearly $900 million of revenue in its first year. All revenue from the tax is statutorily earmarked for the state’s educational funds.
For years, opponents have argued that the capital gains tax is a disguised income tax that violates the Washington Constitution’s requirement that property taxes, including income taxes, be uniform and no more than 1%, unless a higher rate is approved by the voters. However, the state successfully argued before the state Supreme Court that the capital gains tax is an excise tax and therefore not subject to the state constitution’s restrictions on property and income taxes. With the U.S. Supreme Court declining to review the case, the Washington Supreme Court’s decision upholding the tax as valid will remain standing.
Even though judicial challenges to the tax have been resolved, two separate ballot initiatives may end up blocking the tax in 2024. Initiative 2109 would repeal the capital gains tax and Initiative 2111 would prohibit Washington state, counties and cities from enacting taxes based on federal gross income. Both initiatives have gathered enough signatures to be submitted to the state Legislature. Legislators could adopt the initiatives as written or, more likely, ignore or reject them, at which point the initiatives would go directly on the voter ballot for the November 2024 election.
Until then, the tax is sticking around and taxpayers must adhere to the applicable due dates. For example, the return and taxes for 2023 must be filed and paid with the Washington state Department of Revenue by April 15, 2024. Taxpayers receiving an extension of time to file their federal income taxes may also request an extension to file the Washington capital gains tax return, but must remember to file the request with the Department of Revenue before the deadline because the state extension is not automatic.
Whether a ballot initiative overrides the tax remains to be seen. For now, the Washington capital gains tax is here to stay, pending further legislative action or ballot initiatives.
