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MSPC joins national brief encouraging SCOTUS review of WA’s capital gains tax

Mountain States Policy Center (MSPC) is teaming up with tax experts from across the country to ask the Supreme Court of the United States (SCOTUS) to review the constitutionality of the capital gains tax recently imposed in Washington state.

To avoid constitutional restrictions in Washington state, policymakers there called its new capital gains tax an “excise” tax instead of an income tax as it is defined by the rest of the world. Structuring the capital gains tax as an “excise” tax raises U.S. constitutional concerns by attempting to tax transactions from across the country.

MSPC is joined in the brief by Americans for Tax Reform, California Policy Center, Grassroot Institute of Hawaii, Illinois Policy Institute, Independence Institute, National Taxpayers Union Foundation, Manhattan Institute, Oklahoma State Chamber Research Foundation, Opportunity For All Coalition, Reason Foundation, Tax Foundation, and Washington Policy Center.

Washington Policy Center has served as the tip of the spear for the last decade trying to warn about the games state policymakers were playing by refusing to acknowledge a capital gains tax is an income tax.

This “excise” tax game now sanctioned by the Washington state supreme court has national consequences as explained by the tax experts brief:

“Seeking to avoid state constitutional restrictions on income taxes, Washington expressly fashioned the tax as an excise levied on its residents’ sales and exchanges of long-term capital assets (wherever that sale or exchange may occur), not as a tax on the instate income residents receive when they realize capital gains. But state law notwithstanding, the federal implications of allowing an extraterritorial excise tax on out-of-state transactions involving out-of-state property are profound . . .

The Washington Supreme Court’s decision threatens to unsettle numerous limitations on the scope of states’ taxing power and thereby prompt other states to follow Washington’s lead, when it suits their own purposes . . .

Allowing the decision to stand, thereby leaving open the door to extraterritorial excise taxes, will fray the ties that bind the federal system. Permitting such taxes will encourage further predatory behavior by states seeking to take advantage of their neighbors. It will compromise core values of state autonomy and democracy by permitting states to extract remuneration from transactions taking place entirely in other states and involving solely out-of-state property. And it will distort the incentives of state lawmakers everywhere, tempting them to impose taxes on out-of-state transactions instead of more politically costly taxes on in-state income and transactions. All these consequences will damage the system of interstate economic competition that has served the nation well.

States have wide latitude to design their own tax regimes as they see fit as they compete in the interstate economy for business, talent, and prosperity. But they must do so within the territorial parameters the Constitution imposes. Review is urgently needed here to enforce basic principles of federalism and protect the long-standing ground rules for interstate interaction.”

Along with the national tax expert brief, another one was filed by a Washington state business coalition led by the Citizen Action Defense Fund (CADF). From the CADF press release:

“The state supreme court decided that it is an excise tax. The problem is that states aren’t allowed to tax transactions outside their borders. The bottom line is that because this tax is unconstitutional and negatively effects businesses, the U.S. Supreme Court should grant review and take another look at the state supreme court decision here.”

“Washington’s contrived scheme to avoid the Washington State constitution’s limits on income taxes, by constructing a novel capital gains excise tax, trenches on the rights of other states to obtain their reasonable share of tax revenue—and on the rights of taxpayers not to be taxed multiple times—in contravention of the Constitution.”

A decision by SCOTUS on whether to accept the case is expected sometime this winter.

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