For nearly a century, the State of Washington’s constitution has prohibited an income tax. Washington residents like it that way — ballot measures to allow for a state income tax have been rejected by voters ten times in that period, most recently in 2010. But Washington legislators who want an income tax are trying to get around this in the most ham-fisted way possible — simply pretending words mean something they don’t.
Rather than respecting the will of their constituents, Washington legislators are trying to get around that pesky constitutional hurdle by pretending that a tax on capital gains is an “excise tax,” not an income tax. Unlike income taxes, excise taxes are allowed under Washington’s constitution.
The main problem with this bit of legerdemain is that the new capital gains tax isn’t an excise tax. Excise taxes are assessed on specific goods or services, such as taxes on cigarettes or gasoline. They are also indirect taxes, meaning that the cost of the tax can be passed on to someone else further along in the supply chain — for example, though a cigarette manufacturer pays cigarette excise taxes to the government, the manufacturer recoups this cost by passing it on to the consumer in the form of higher prices.
Neither of these characteristics are true of the capital gains tax passed by Washington last year. The law in question created a 7 percent “excise tax” on Washington taxpayers’ taxable capital gains. The tax falls directly on taxpayers who owe it, with no ability to pass it on to consumers down the line, and is assessed on income, not a good or service. In other words, it is an income tax on a specific subset of income, not an excise tax.
That capital gains taxes are income taxes is an almost universally-recognized truth among tax policy experts. A collection of tax policy professors and experts just told courts as much in a recent amicus brief submitted to the state Supreme Court. Even the Internal Revenue Service has publicly stated that capital gains taxes are income taxes, not excise taxes.
Fortunately, thus far courts have not entertained state legislators’ specious arguments. A lower state court struck down the capital gains tax as unconstitutional under state law, though the state is currently appealing the ruling to the state Supreme Court. As long as that appeal is taking place, Washington’s Department of Revenue is continuing to administer the tax, though it promises that assessments will be paid back with interest should the state lose in court (again).
However, this should not be a particularly lengthy discussion. The facts of the matter are clear: income taxes are unconstitutional under Washington state law, the capital gains tax is a form of income tax, and therefore the capital gains tax is unconstitutional.
Rather than resorting to weak end-arounds, income tax advocates should work on trying to convince voters that an income tax is good for Washington. It doesn’t take much to imagine why they prefer to try to get an income tax through legal obfuscation, though — taxpayers know what happens when you give a mouse a cookie.
