(The Center Square) – State Sen. Jamie Pedersen, D-Seattle, said that he hoped the state Supreme Court will clear the way for an income tax at a recent 43rd District Democrats general meeting.
He reiterated wanting to use Washington state’s controversial capital gains income tax – recently ruled unconstitutional by the Douglas County Superior Court – as a means of getting the state Supreme Court to allow the legislature to pass a broad-based, graduated income tax.
“The next step was to do the capital gains tax, which is important – I mean, it’s not an insignificant amount of money – but the importance, in my opinion, is less about the dollars that it’s raising and more about the fact that the opponents are attacking it as an income tax, and that gives us a clean shot to go back to the Supreme Court and go back to the root of this entire problem,” Pedersen said at the March 15 virtual meeting.
He went on to say, “We’ve got to figure out how to have an income tax in our state, in getting the state Supreme Court to say, ‘You are free legislature to do an income tax, or a capital gains tax, or wealth tax,' you know, any of these things, with a simple majority, is what we’ve been working on.”
On March 1, Douglas County Superior Court Judge Brian Huber ruled the state’s capital gains income tax – passed and signed into law by Gov. Jay Inslee last year – is unconstitutional.
"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,” Huber wrote in his ruling.
Those are references to state Supreme Court decisions, including the 1933 Culliton v. Chase case in which the justices invalidated a voter-approved progressive income tax meant to pay for education.
Huber also referenced the 1936 Jensen v. Henneford case in which the justices ruled that a state tax “on the privilege of receiving income” violated state uniformity requirements, as well as the court’s 1951 ruling in Power, Inc. v. Huntley that stated, “The character of a tax is determined by its incidents, not by its name.”
Huber seemed to adhere to that in his ruling.
“As a tax on the receipt of income, ESSB 5096 is also properly characterized as a tax on property pursuant to that same caselaw,” he wrote. “This Court concludes that ESSB 5096 violates the uniformity and limitation requirements of article VII, sections 1 and 2 of the Washington State Constitution. It violates the uniformity requirement by imposing a 7% tax on an individual's long-term capital gains exceeding $250,000 but imposing zero tax on capital gains below that $250,000 threshold. It violates the limitation requirement because the 7% tax exceeds the 1% maximum annual property tax rate of 1%.”
It's widely expected the state Supreme Court will have the final say on the capital gains income tax.
Pedersen’s comments at the meeting reflect his longtime goal of leveraging a capital gains income tax into a state Supreme Court ruling allowing the legislature to impose a graduated income tax without a constitutional amendment.
Emails from Pedersen obtained by the Washington Policy Center in 2020 indicate as much.
“But the more important benefit of passing a capital gains tax is on the legal side, from my perspective,” he wrote in an email dated April 30, 2018. “The other side will challenge it as an unconstitutional property tax. This will give the Supreme Court the opportunity to revisit its bad decisions from 1934 and 1951 that income is property and will make it possible, if we succeed, to enact a progressive income tax with a simple majority vote.”
In an email dated Dec. 15, 2018, Pedersen wrote, “I personally believe that adopting a capital gains income tax is one of the best things we could do to help advance the possibility of an income tax in our state, because it could help resolve the legal uncertainty about whether an income tax is a ‘property tax’ subject to constitutional limitations. Until that happens, it would take 2/3 majorities in the legislature (and a vote of the people) to adopt an income tax, which make is very unlikely to happen.”