The latest: On November 30, 2022, the Washington Supreme Court voted unanimously to allow the Department of Revenue (DOR) to start collecting the capital gains excise tax while the Court is in process of hearing the case next year. The state is expected to create an online platform for taxpayers to report and pay the tax, along with making regulations with additional guidance.
In April 2021, the state of Washington’s Legislature passed a state capital gains tax for individuals with Washington-allocated gains. This 7% tax will be charged on the sale of long-term investments exceeding $250,000, like stocks, bonds, businesses, and other assets. Real estate and land structures are excluded. The proceeds will fund the state’s early education and childcare programs and are expected to total nearly $415 million.
In March 2022, however, Douglas County Superior Court Judge Brian Huber struck down Washington’s new capital gains tax. Supporters say the tax could help improve equity throughout the state, while critics argue it disproportionately affects startups and damages the state’s competitiveness.
The controversy surrounding the capital gains tax relies on categorizing it as an excise tax rather than an income tax. Washington State is one of only nine states that does not have an income tax, which is deductible at the federal level. An excise tax is a legislated tax on the sale of specific goods, services, or activities. For example, there’s a federal excise tax on coal, certain chemicals, and kerosene.
The Supreme Court will begin to hear oral arguments to determine the constitutionality of the tax on January 26, 2023. If ruled unconstitutional, all payments made before then would be refunded.