The Budget and Policy Center and our partners helped get the capital gains excise tax passed to support our communities. Although wealthy special interests  are trying to overturn it in the courts, this commonsense tax is a smart policy that aligns with state tax law precedent. We invited appellate law expert Howard Goodfriend to help explain why the capital gain tax should be upheld by the Supreme Court in this guest blog post.

Washington State’s Supreme Court is set to hold oral arguments in Quinn v. State of Washington, a case that will determine the fate of the state’s capital gains excise tax. This case presents an important opportunity for the Supreme Court to clarify that Washington state’s constitutional provision – which requires uniform property taxes – does not prohibit a graduated capital gains excise tax to fund the legislature’s social and economic priorities and to help fix longstanding inequities in the tax structure. That’s why my law firm submitted an amicus brief to the Washington State Supreme Court signed by six notable and well-respected law professors from Washington state and around the country.

First, a quick review of where we are: In 2021, the Washington State Legislature heeded the calls of their constituents and passed a 7% state capital gains excise tax on profits over $250,000 on stocks, bonds, and other similar assets. Profits from the sale of real estate, farm equipment, or the sale of a small family-owned business are exempt from the tax. Soon thereafter, a wealthy investment manager joined by other plaintiffs sued the state in Douglas County superior court. While the superior court ruled that the graduated capital gains tax is a prohibited property tax, the Washington Supreme Court recently allowed the state to implement the tax while it hears the state’s appeal. We believe the state Supreme Court will ultimately uphold the tax as a constitutional excise tax.

Simply put, an equitably structured capital gains tax on profits earned upon the sale or exchange of stocks and bonds is not a property tax. The tax was structured by the legislature to fit squarely within the Supreme Court’s longstanding definition of an excise tax. The Court has defined an excise tax as one that is collected upon the transfer of an asset, not directly on the asset itself. This is how the capital gains tax works. It is not a direct tax on the value of stocks and bonds or any other assets, but rather a tax on the one-time sale of those assets when they generate extraordinary profits.

The Washington State Constitution does not limit the legislature’s prerogative to devise fair and equitable excise taxes to fund its residents’ basic needs in housing, health care and education and to redress past economic and social inequities.

The challengers seeking to strike down the capital gains tax are asking the Court to expand upon and extend a Depression-era decision. But the Supreme Court has long distinguished this ruling to uphold all sorts of reasonable progressive taxes that are similar to the capital gains tax – because they are targeted to specific transactions. These include the surtax on banks making more than $1 billion, the real estate excise tax, and the estate tax. The Court can and should follow the same logic to uphold this commonsense tax.

Rather than creating a new, regressive precedent to enable the wealthiest Washingtonians to avoid paying their share to support the common good, the Court should rely on its substantial excise tax precedent to uphold the legislature’s decision to tax capital gains. By upholding the law under these existing precedents, the Court will continue to make significant progress to move away from long-repudiated constitutional doctrine that exalted property rights over human rights.

Washington state’s tax code is the most regressive in the nation. People with the lowest incomes pay up to six times more of their income in state and local taxes than the wealthiest 1%. The capital gains excise tax, which affects fewer than 8,200 households statewide, is an important step toward making our state’s tax code more equitable. Beyond the obvious legal arguments, upholding this tax on the ultra-wealthy is simply the right thing to do.

Howard Goodfriend is a principal in the Seattle firm of Smith Goodfriend, P.S. Seattle’s oldest appellate boutique. Howard has argued hundreds of civil appeals in almost every substantive area of the law, representing publicly traded companies, small family businesses, professionals, state and local government, hospitals, and individuals. He is co-editor-in-chief of the Washington State Bar Association’s Appellate Practice Deskbook and author of the Appellate Practice chapter of the King County Bar Association’s Washington Lawyers Practice Manual. Howard is a past president of the American Academy of Appellate Lawyers, is a founding member and past president of the Washington Appellate Lawyers Association, and has been repeatedly recognized by his peers as one of Washington’s top ten appellate lawyers and top 100 lawyers.

His law firm submitted an amicus curiae brief to the Washington State Supreme Court, signed by several law professors who argue that the capital gains excise tax should be upheld based on constitutional and tax law precedent. The Budget and Policy Center also submitted amicus briefs, which you can learn more about in our press release.