The Supreme Court in Washington State recently ruled that the state’s seven percent capital gains tax is constitutional.

The ruling, which basically states that capital gains taxes are different from property taxes in the state of Washington, comes right after Biden’s tax proposal, which would almost double the long-term capital gains tax. In addition to doubling the LTCG rate, Biden wants to increase taxes for Medicare and create a minimum tax on billionaires. 

Washington Governor Jay Inslee applauded the state’s supreme court ruling, which will create an additional $1 billion in projected tax revenue. The capital gains tax is due at the same time as the individual’s federal income tax return is due, and filing an extension does not extend the due date for paying the capital gains tax owed.

The tax is supposedly only for individuals, but individuals can also be liable for the tax from a pass-through or disregarded entity that sells long-term capital assets. The tax only applies to gains allocated to Washington state.

However, some deductions and exemptions can reduce the taxable amount of long-term gains. For example, there is an annual standard deduction of $250,000 per individual, BUT for couples married filing jointly, the COMBINED standard deduction is still $250,000 whether they file joint or separate returns.  

The bill went to the state’s Supreme Court because the tax on capital gains are income, and that income is derived from property. Washington state’s constitution clearly says that all property tax is limited to one percent. The opponents of the tax and the court’s two dissenting justices argued that the seven percent capital gains tax in the state of Washington was unconstitutional. However, Washington’s Supreme Court determined the capital gains tax to be a legal excise tax, not a property tax.

“The tax is constitutional as an excise tax because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.”

Excise taxes are taxes on a specific type of good or service, like a gasoline or a cigarette excise tax, paid by the consumer. Property taxes in another excise tax that consumers pay directly.

The court ruled that the capital gains tax is an excise tax on the SALE of individual long-term capital assets that exceed $250,000. In Washington, a property tax is a tax on property ownership, while the capital gains tax is on the sale or transfer of the property.

The ruling sets Washington state apart from other states that consider capital gains taxes to be income taxes. The IRS also shares this opposing view. Currently, 41 states tax capital gains, with California (13.3%) having the highest tax on LTCGs, followed by Massachusetts (12%), New Jersey (10.75%), and Minnesota at 9.85%.

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