The Washington Supreme Court ruled 7-2 Friday the state’s new capital gains tax was constitutional, handing a defeat to the Washington Farm Bureau and others who challenged the tax.

The majority reversed a Douglas County Superior Court judge who ruled the tax violated the state constitution’s limits on taxing property, in this case income from selling assets.

The high court ruled the capital gains tax was a tax on the act of selling assets, not a property tax on the income gained from the transactions.

Justice Debra Stephens authored the majority opinion and was joined by Justices Steven Gonzalez, Mary Yu, Barbara Madsen, Raquel Montoya-Lewis, Susan Owens and Helen Whitener.

Justices Sheryl Gordon McCloud and Charles Johnson dissented. Gordon McCloud began the dissenting opinion succinctly:

“Capital gains are income.

“In Washington, income is property.

“A Washington ‘capital gains tax’ is therefore a property tax.”

The ruling was a victory for Gov. Jay Inslee and Democratic lawmakers who say the tax will fund education and make the state’s tax code more progressive.

“We bent the arc of the moral universe towards justice big time thanks to this decision,” Inslee said in a call with reporters.

The ruling “provides the much needed clarity for us to move forward with significant reform to our tax structure,” said House Finance Committee chairwoman April Berg, D-Mill Creek.

“I’m over the moon with today’s ruling,” she said.

Berg declined to say whether House Democrats will propose new or higher taxes this session.

Inslee said the ruling does not set the stage for an income tax. “The income tax is a Republican talking point,” the governor said. “Not going to happen.”

The 7% tax applies to capital gains over $250,000 in a year. The tax does not apply to real estate, including farmland. The tax, however, applies to business partnerships.

The Farm Bureau took a leading role in challenging the tax, saying it would hit farmers who sold their shares in farming enterprises. The Washington State Tree Fruit Association and Washington State Dairy Federation also joined in suing to overturn the tax.

Inslee characterized opponents of the tax as “the ultra-wealthy” who “brought in some really high-priced lawyers.”

“I’m definitely disappointed that’s what Gov. Inslee thinks,” said Central Washington orchardist April Clayton, the lead plaintiff in the lawsuit brought by farm groups against the tax.

The tax will hit farmers who sell assets to maintain the rest of their operations, she said. “It’s really going to hurt small famers, like me, who want to keep farming,” she said. 

Writing for the majority, Stephens stated that Washington’s “upside-down tax system perpetuates systemic racism.”

“The wealthiest households in Washington are disproportionately white, while the poorest households are disproportionately (Black, Indigenous and people of color),” she wrote.

The Washington Department of Revenue estimates 7,000 taxpayers will owe the tax each year. The tax will raise $2.5 billion over the first six years, the department projects.

Although Douglas County Judge Brain Huber ruled last year the tax was “inoperable,” the Supreme Court reinstated it pending its ruling. Taxes on 2022 capital gains are due April 18 to coincide with the deadline to file federal income tax forms.

Today’s decision did not overturn the 1933 Culliton v. Chase ruling in which the state Supreme Court declared that a graduated state income tax violated the state constitution.

That decision found that income was property. The state constitution bars unequally taxing property. It also limits taxes to 1% of the property’s value.

The capital gains tax is “wholly unlike the broad-based net income taxes we previously invalidated under Culliton,” Stephens wrote.

Stephens likened the capital gains tax instead to taxes on gross business receipts or real estate sales. The capital gains tax does not actually tax capital gains, but is “rather, measured by capital gains,” she wrote.

In the dissent, Gordon McCloud stated the tax wasn’t triggered by selling an asset, it was triggered by the amount of income gained from selling assets.

She cited Black’s Law Dictionary and the Internal Revenue Service as defining a tax on capital gains as a tax on income. The other 41 states with a capital gains tax treat it as an income tax, she stated.

The state constitution plainly limits income taxes to 1%, she wrote.

“In a contest between a Washington statute and the plain language of the Washington Constitution, the judicial branch has the duty to uphold the constitution,” Gordon McCloud stated.

Senate Republican Leader John Braun said in a statement that the court got the ruling wrong.

“Every other state and the IRS say that a capital gains tax is, without a doubt, an income tax,” he said.