Yesterday, the Washington state supreme court ruled, 7-2, that a recently-passed capital gains tax was allowed by the state constitution. This is really good! I think the tax is indeed constitutional, but to be fair, the majority’s reasoning is a bit counter-intuitive. Following it leads us into a messy thicket of semantics — and we can blame the ruling’s surprisingly opaque nature on Washingtonians past and a weird constitutional provision that they wrote.
The parties disagreed over what sort of tax this was. The following is written into Article 7, Section 2 of the state’s constitution:
“Except as hereinafter provided and notwithstanding any other provision of this Constitution, the aggregate of all tax levies upon real and personal property by the state and all taxing districts now existing or hereafter created, shall not in any year exceed one percent of the true and fair value of such property in money.” (Emphasis mine.)
The capital gains tax has the state collecting 7% of people’s annual profits from the sale of certain classes of assets, which is greater than that one percent cap. It also exempts the first $250,000 in annual profit — leading opponents to argue that it violates another constitutional requirement that “[a]ll taxes shall be uniform upon the same class of property.”1
But it’s okay: the court ruled that the capital gains tax does not violate the state’s constitution because it is an excise tax, not an income tax, and is therefore not subject to those requirements. (It matters whether the tax is an “income tax” because a 1933 state supreme court decision, Culliton v. Chase, held that income taxes qualify as property taxes, not excise taxes, for the purposes of Article 7.)
Opponents of the tax are angry, and they have what may appear to be a convincing message. It’s best summed up by the start of Justice Sheryl Gordon McCloud’s dissent:
“‘Capital gains’ are income. In Washington, income is property. A Washington ‘capital gains tax’ is therefore a property tax.”2
The Washington Policy Center, a conservative think tank, has put out a salty press release. “Every other tax jurisdiction in the world, from the IRS, to every other state, to other countries will tell you the same thing – capital gains are income and taxes on them are income taxes,” one of their experts writes.
In casual conversation, if someone were to ask me what is “being taxed” here, I would describe it as a form of income: capital income. But the law doesn’t always run on colloquial meaning. Even if you accept the assertion that capital gains are income and therefore property, we need to distinguish a couple different notions of “levying a tax upon something” from each other.
The capital gains tax applies to profits from the sale of assets. When it’s levied, a couple different things are being taxed, depending on the sense in which we’re talking about taxing something:
X. The tax is levied on the sale of the asset, in the sense that this action triggers the levying of the tax.
Y. The tax is levied on the receipt of income from the sale of the asset.
The majority basically argues that we should be thinking about this in terms of X. The implication is that the capital gains tax is levied on the exercise of a specific right of a property owner, “not purely on the ownership of property.”3 The dissenters and Washington Policy Center embrace Y, claiming that the ownership of property is in fact what’s being taxed, so those provisions in Article 7 apply. To back this up, the dissent emphasizes that the tax amount is determined by the amount of income from the transaction.
Accepting X and running with it might feel sort of icky or pedantic; can 49 states and the IRS really be wrong about what an income tax is? In this very specific and strange context, yes, they can.
Washington is one of a minority of US states with no income tax because of Culliton, which meant that any state income tax would need to be limited to a flat, regressive 1%. Such a tax would not be very helpful; not as a big revenue source, nor in the pursuit of economic equality. Instead, the state has relied on other taxes — mainly, a 6.5% sales tax, a “business and occupancy” (B&O) tax which applies to businesses’ gross incomes, and a regular old property tax which the state must ensure does not exceed that one-percent cap.
Despite rates over 1%, the sales and B&O taxes have been upheld as constitutional because they are not taxes levied on the ownership of property. They are levied on the sale of an item, or as the majority puts it, “the privilege of engaging in business.”4 If that reasoning sounds familiar, it’s because it is similar to definition X from above.
Here’s a key quote from Stiner, the 1933 decision ruling that the B&O tax was constitutional. With a couple small tweaks it could have been part of yesterday’s majority opinion.
“This act does not concern itself with income which has been acquired, but only with the privilege of acquiring, and that the amount of the tax is measured by the amount of the income in no way affects the purpose of the act or the principle involved.”5
Looking back at the sales and B&O taxes, you might notice something else: Applying definition Y could lead one to the conclusion that they are unconstitutional. Sales taxes apply to when someone comes to own something (that’s just, like, what a transaction is). The amount of tax levied is determined by the price of the thing that’s now owned, one might say, so it’s a tax on property and therefore subject to the stranglehold of the one percent cap. B&O taxes apply when a company comes to own revenue. The amount of tax levied on that revenue is determined by its amount, one could argue, so again, it’s a tax on property.
This is the problem with baking a provision into your constitution that sets such draconian limits on taxing property writ large: taxes are always going to apply to property ownership in some sense, whether through the transfer of ownership over property or the simple fact of owning property. Under some interpretations like Y, those clauses in Article 7 could neuter the state government’s ability to function by raising sufficient revenue. But years of precedent and policy have accumulated within a framework that avoids this glaring problem: the notion of taxation outlined in X that the majority embraced yesterday.
Interestingly, you can think of labor income as the result of a transaction where a worker sells their labor in exchange for a wage. You can imagine someone making an argument that, contrary to the precedent set by Culliton, a personal income tax is levied on these transactions, and therefore not subject to the constitution’s one percent cap and uniformity requirements.
Maybe this involves completely degraded notions of what it means to tax something. Maybe it is made within absurd semantic parameters. But that is not the fault of the person making the argument: it’s the fault of those responsible for the text of Washington state’s constitution.
One more thing. Now I get to be the one making a plain-meaning, just-look-at-the-text argument. So much of the opposition to the constitutionality of the capital gains tax is rooted in the premise that when the state constitution talks about taxes levied upon property, it is not only talking about property taxes as we know them colloquially — as taxes that people who own assets, like houses or land, pay yearly on their value simply by virtue of owning them. They back this up by pointing out that the state constitution has a really wide definition of what constitutes “property.”
Much of the rhetoric from the right on this has been about the simple fact that everyone considers a capital gains tax to be a type of income tax. The existence of Culliton allows them to leave it at that. But there is also a reason that they do not try and explicitly claim that everyone thinks an “income tax” is a type of “property tax”: this would not be consistent with how those types of tax are defined in practice.
Washington state constitution, article 7, section 1.
Chris Quinn v. State of Washington (2023), McCloud dissent, 1.
Chris Quinn v. State of Washington, Stephens majority opinion, 3.
Chris Quinn v. State of Washington, Stephens majority opinion, 10.
State ex rel. Stiner v. Yelle (1933), Tolman majority opinion, 407.