Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
Editor's Note: The Washington capital gains tax is on the November election ballot. 10/8/2024: Voters in the Evergreen State can decide whether to repeal or retain the tax. For more information, see Kiplinger's report, Capital Gains Tax on Election 2024 Ballot.
Capital gains tax is back in the news. The Supreme Court in Washington ruled that the state’s 7% capital gains tax, enacted two years ago, is constitutional. The controversial ruling, which essentially says that capital gains taxes are not property taxes in Washington state, came on the heels of President Biden’s budget proposal calling for a near doubling of the national capital gains tax rate.
Additionally, a recent survey shows that most Seattle voters would support a proposed citywide capital gains tax. If passed, the measure would be similar to the statewide capital gains tax on sales of stocks and bonds over $250,000 in a year.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Washington Governor Jay Inslee welcomed the state supreme court ruling, which has paved the way for what was initially estimated to be $1 billion in projected revenue from the tax.
“Washington’s capital gains tax helps right an upside-down tax structure where low-income Washingtonians ultimately expend a much larger share of their income in taxes than our wealthiest residents,” Inslee said in a statement.
The state's Department of Revenue, as of April, reported over $830 million in revenue from the capital gains tax measure. (That amount, which comes from early state taxpayer filing data, is so far on pace to exceed the projected revenue for 2023 of $248 million.)
The Washington Policy Center, a nonprofit think tank that opposes the capital gains tax, called the court’s ruling in Quinn v. State of Washington a distortion of the “clear language of the state constitution.”
And in late August of last year, the Freedom Foundation, a conservative think tank, filed an appeal with the U.S. Supreme Court. The group wants the court to take up the case and find that the state's capital gains tax violates the Commerce Clause of the U.S. Constitution. However, in January 2024, the U.S. Supreme Court declined to hear the case.
Washington State capital gains tax
The Washington capital gains tax at issue is 7% on the sale or exchange of individual long-term capital assets (e.g., stocks, bonds, business interests, etc.) that exceed $250,000. Only the portion of gains above the threshold is subject to the tax and some assets are exempted from the tax. A small number of Washington taxpayers overall, (i.e., about 5,000 people) are expected to be subject to the tax.
The legal argument against the tax (from a state law perspective) is mainly that capital gains are income and that income is property. Under the state's constitution, property tax is limited to one percent. So, opponents of the capital gains tax (and the court's two dissenting justices) contend that the 7% capital gains tax in Washington is unconstitutional.
However, in the majority (7-2 ruling) the Washington Supreme Court found the capital gains tax in Washington to be a legal excise tax — not a property tax. Justice Debra L. Stephens wrote, “The tax is constitutional as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”
The ruling sets Washington state apart from other states (and the IRS) that consider capital gains taxes to be income taxes. Washington state officials say that the revenue collected from the capital gains tax will help fund public education in the state. Meanwhile, some opponents worry that the capital gains tax could discourage business in the state.
Excise taxes?
The Washington capital gains tax case also raises questions about excise taxes. Excise taxes are special taxes on specific types of goods or services. (You may have heard of a gasoline excise tax or a tobacco or cigarette excise tax). Excise taxes are typically included in the price that you pay for the specific product (i.e., businesses typically pass the taxes onto consumers),
But some excise taxes are paid directly by consumers. For example, there are excise taxes levied on retirement accounts when account holders fail to take required minimum distributions (RMDs) on time. Additionally, property taxes can be another kind of excise tax that consumers pay directly.
The court ruled that the capital gains tax is an excise tax on the sale of certain goods — in this case, individual long-term capital assets that exceed $250,000. That’s because the Washington Supreme Court court found that in Washington, a property tax is a tax on “mere ownership” of property; while the capital gains tax taxes the power to sell and transfer the property.
Which states have capital gains tax?
Currently, forty-one states and the District of Columbia tax capital gains and the federal government taxes capital gains. But the 7% capital gains tax aside, Washington state doesn't have state personal income tax.
Related Content
-
Forget FIRE: Why ‘FILE’ Is the Smarter Move for Child-Free DINKsHow shifting from "Retiring Early" to "Living Early" allows child-free adults to enjoy their wealth while they’re still young enough to use it.
-
7 Tax Blunders to Avoid in Your First Year of RetirementA business-as-usual approach to taxes in the first year of retirement can lead to silly trip-ups that erode your nest egg. Here are seven common goofs to avoid.
-
How to Plan for Social Security in 2026's Changing LandscapeNot understanding how the upcoming changes in 2026 might affect you could put your financial security in retirement at risk. This is what you need to know.
-
3 Major Changes to the Charitable Deduction for 2026Tax Breaks About 144 million Americans might qualify for the 2026 universal charity deduction, while high earners face new IRS limits. Here's what to know.
-
Retirees in These 7 States Could Pay Less Property Taxes Next YearState Taxes Retirement property tax bills could be up to 65% cheaper for some older adults in 2026. Do you qualify?
-
Estate Tax Quiz: Can You Pass the Test on the 40% Federal Rate?Quiz How well do you know the new 2026 IRS rules for wealth transfer and the specific tax brackets that affect your heirs? Let's find out!
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Tax Refund Alert: House GOP Predicts 'Average' $1,000 Payouts in 2026Tax Refunds Here's how the IRS tax refund outlook for 2026 is changing and what steps you can take now to prepare.
-
New IRS Changes to FSA Contribution Limits for 2026: What to KnowHealth Care Flexible Spending Accounts have tax advantages worth looking into, especially in light of new IRS changes.
-
Is a New $25,000 Health Care Tax Deduction Coming in 2026?Tax Policy A proposal from GOP Sen. Josh Hawley adds to the chatter about health care affordability.
