For generations, Washington State had no state income tax, because of anti-income tax provisions in its state constitution. But the Washington state supreme court recently upheld a classic example of an income tax — a state tax on income from capital gains — by making the absurd argument that a capital gains tax is an “excise tax,” not an income tax. That was nonsense. The IRS and all other states deem capital-gains taxes to be income taxes, because they are levied on the amount of income you make from selling an asset, such as shares of stock or the sale of your home. The state supreme court could not deny this, and seems to have been motivated by racial, rather than legal, considerations, in reaching its ruling. It claimed that Washington’s traditional tax system “perpetuates systemic racism by placing a disproportionate tax burden on BIPOC residents,” who pay a higher fraction of sales taxes than of income or capital gains taxes.
As broadcaster Jason Rantz notes, the state supreme court’s opinion “doesn’t read like a Court decision, but a press release from a pro-tax, anti-capitalist Seattle activist group. But that’s what the Washington State Supreme Court has become.” The state supreme court’s 7-to-2 ruling is in tension with the fact that, as the tax consulting firm RSM notes, “the IRS defines capital gains as income and the Washington capital gains tax relies on federal income tax reporting.”
If other state supreme courts similarly redefine income taxes as excise taxes, that could weaken tax limits contained in other states’ laws, such as Virginia law’s ban on income taxes levied by cities and counties. This Tuesday, Virginia is holding legislative elections. Virginia’s legislature picks the state’s judges, and Democrats are slightly favored to take control of the state legislature. When they last controlled the Virginia legislature, the Democrats expanded and packed the Virginia Court of Appeals. But the Virginia supreme court currently is split 4-to-3 in favor of Republicans. Residents of northern Virginia pay 3.2% less of their income in taxes than residents of neighboring counties in Maryland, because Maryland permits county income taxes, and Virginia doesn’t.
If Democrats win the Virginia elections Tuesday, they could pick judges who uphold taxes at odds with the state constitution. Or they could pick judges who are more likely to release dangerous criminals. Some progressive judges issue rulings that favor criminals. A Democratic judge in Fairfax County ruled in 2020 that it violated the Constitution for a courtroom to contain the portraits of mostly white judges during the trial of a minority defendant. If applied retroactively to other Virginia cases, such a ruling could lead to the release of thousands of violent criminals, because courtrooms commonly contain portraits of past and present judges, and most Virginia judges are white (just as most Virginia residents are white). The Democratic leader in the Virginia House of Delegates is a convicted felon who served seven years in prison and proposed a bill in 2020 that would have released some dangerous criminals, including murderers, even if their prison disciplinary record showed a continuing propensity for violence. He will become speaker of the House of Delegates if the Democrats win Tuesday’s election.
The Washington state supreme court consists mostly of Democratic appointees, and the state’s Democratic legislature passed the 7% capital gains tax that the state’s Democrat-dominated state supreme court upheld. For some businesses, the new capital gains tax may result in a form of unjust double taxation, because they are already paying other taxes designed to compensate for the traditional lack of any income tax in Washington State. Washington State has long imposed other taxes on businesses to make up for the inability to impose income and capital gains taxes (such as excise taxes and an unusually burdensome gross receipts tax). Those other taxes — absent in most states — were not replaced by the new capital gains tax, but rather, remain in force in addition to it.
Washington’s high court is not the only state supreme court to nullify tax limits contained in its state constitution. For example, Nevada’s supreme court did that in 2007. In an extraordinary act of judicial activism, it effectively nullified a state constitutional provision requiring a two-thirds vote for tax increases, by ruling that the legislature could raise taxes to increase education spending by a simple majority vote of less than two-thirds. In essence, it treated the two-thirds requirement as a mere “procedural” technicality.