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Lawsuit filed to block new Washington capital gains tax

April 28, 2021 GMT

SEATTLE (AP) — A lawsuit was filed Wednesday that seeks to block the new capital gains tax on high-profit stocks, bonds and other assets that the Washington Legislature approved this week.

KUOW reports the conservative Freedom Foundation filed the lawsuit on behalf of five individuals and one couple. The legal action in Douglas County, Washington, says the 7 percent tax on gains above $250,000 is an unconstitutional income tax. They also said it violates the Commerce Clause of the U.S. Constitution.

According to the lawsuit, all of the plaintiffs own capital assets and would potentially be subject to the tax. Supporters of the capital gains tax have said it’s an excise tax, not an income tax, and say that by taxing the state’s wealthiest residents it will make Washington’s tax code less regressive.

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While legal challenges to the new tax were anticipated, this lawsuit was filed before Gov. Jay Inslee signed the tax into law.

The measure narrowly passed the Democratic-led Senate on a 25-24 vote Sunday afternoon, following a 52-44 vote Saturday night in the House.

Original versions of the capital gains tax looked to bring in $500 million a year, but the latest version settled on by House and Senate Democrats is expected to bring in $415 million in 2023, the first year the state would see money from the tax, which would start in 2022.

Business owners are exempt from the tax if they were regularly involved in running the business for five of the previous 10 years before they sell, own it for at least five years, and gross $10 million or less a year before the sale.

Retirement accounts, real estate, farms and forestry would be exempt from the proposed tax. One new element added to the bill during negotiations was allowing a taxpayer to deduct up to $100,000 a year from their capital gains if they made more than $250,000 in charitable donations in the same tax year.

Republicans argued that Democrats want the state Supreme Court to rule on the issue as it pertains to income taxation before the public can. A graduated income tax was enacted by initiative in 1932, passing with about 70% of the vote. But it was thrown out by the state Supreme Court a year later, which pointed to the state constitution’s call for uniform taxation on property.