It's not an exaggeration.  The Washington State Supreme Court began hearing arguments today on whether SB 5096, passed in 2021, is Constitutional.  The bill would create a 7% tax on capital gains.  The authors of the bill framed capital gains as an excise tax, and that is where the focus of the fight lies.

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What is a Capital Gains Tax?

A capital gain is defined as "the increase in value of an asset (such as stock or real estate) between the time it is bought and the time it is sold"  A capital gains tax is levied on the profit you made on the sale.  If you bought a boat for $70,000 and sold it for $80,000 you would pay capital gains tax on the $10,000 profit.  The IRS, along with all other states in the U.S., defines capital gains as income and needs to be reported on your annual income tax return.

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Washington State voters have said no to an income tax 10 times.  The State Supreme Court ruled in 1932, after voters approved a graduated income tax, that it violated the State Constitution.  The Court defined income as property, and as such, must be taxed uniformly and limited to 1% per year.  The proponents of SB 5096, and of a state income tax, are arguing that capital gains is not income.

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The State Supreme Court will be asked to determine if nearly 100 years of Court ruling are flawed, regarding treating income as property, or if the Court's previous interpretations of the State Constitution are sound.  The last time the State's highest court was asked to rule on this subject was 1960, where they again affirmed previous court rulings.

The Justices then stated "the constitution may be amended by vote of the people. Such a constitutional amendment was rejected by popular vote in 1934."  The takeaway being don't ask the Court to do the Legislatures job.  A decision will not come today, but when it does, the landscape of the State could be changed forever.  A vote to affirm SB 5096 will open the door to passage of a State Income tax that would forever alter the landscape of the Evergreen State.

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