Capital gains income tax lawsuit FACT CHECK

By Jason Mercier
Nov 9, 2021 

Last month the Attorney General filed a response to the capital gains income tax lawsuit. The trial date for this case is scheduled for February 4, 2022. There were a couple of interesting statements from the Attorney General’s brief. Below is a quick compare and contrast of the statements from the Attorney General and the facts about capital gains income taxes.

Attorney General:

“Defendants deny the assertion that ESSB 5096 imposes an income tax, and deny that Plaintiffs’ understanding of information provided by the Internal Revenue Service as it pertains to the distinction between an income tax and an excise tax is complete or accurate."

Internal Revenue Service:

“This is in response to your inquiry regarding the tax treatment of capital gains. You ask whether tax on capital gains is considered an excise tax or an income tax? It is an income tax. More specifically, capital gains are treated as income under the tax code and taxed as such."

Attorney General:

"Defendants deny the assertion that ESSB 5096 imposes an income tax, and deny that Plaintiffs’ understanding of information purportedly obtained from the Congressional Budget Office as it pertains to the distinction between an income tax and an excise tax"

Congressional Budget Office:

“Capital Income Taxes - Capital income taxes are taxes on the return on investment . . . The individual income tax combines a tax on labor income and a tax on capital income, such as interest, dividends, capital gains, and certain business profits. The corporate income tax and estate tax also apply a tax to capital income . . . Individual and corporate income taxes affect both labor and capital income. Excise taxes are consumption taxes on specific goods.”

Attorney General:

“Defendants deny the assertion that ESSB 5096 imposes an income tax, and deny that Plaintiffs’ understanding of information purportedly obtained from state revenue departments as it pertains to the distinction between an income tax and an excise tax is complete or accurate.”

50 state capital gains tax survey of state revenue directors:

All state revenue departments describe capital gains as income. Those that tax capital gains do so via their income tax codes. No state taxes capital gains as an excise tax. Here are direct quotes from each state revenue department on how they treat capital gains income.

Understandably the Attorney General has a tough job defending political talking points that aren’t backed up by any tax professional in the world. That said, it is disappointing to see the state’s top attorney denying basic tax facts that are universally acknowledged across the country about capital gains income taxes.