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Washington state’s new controversial capital gains tax goes before a Douglas County judge on Wednesday, as oral arguments for a pair of lawsuits kick off.

Court battle over capital gains tax could rewrite Washington’s tax code

The Democrat-led Legislature approved the 7% tax on capital gains over $250,000, which is estimated to bring in over $400 million in 2023, the first year it is due to be collected. Those dollars will be used to invest in child care and early learning, among other things, as a way to balance the state’s tax code. That’s according to supporters, who insist it will impact less than 1% of the state’s wealthiest taxpayers.

The conservative Freedom Foundation over the tax even before Gov. Jay Inslee signed the legislation. That was followed a short time later by filed by former state Attorney General Rob McKenna on behalf of several residents, including manufacturing business owners, investors, and the Washington Farm Bureau.

Supporters of the tax created in describe it as an excise tax on the sale of stocks, bonds, and other assets above $250,000, excepting real estate and family-owned small businesses.

Washington Rep: Capital gains tax is just ‘parity in the tax code’

McKenna’s lawsuit challenges the assertion that it’s an excise tax, while the Freedom Foundation focuses on it being an illegal graduated income tax in violation of the state constitution, as well as a violation of the U.S. Commerce Clause because it allocates taxable gain to Washington based on the taxpayer’s residency instead of where the sale generating the gain occurs.

Both lawsuits were filed in Douglas County Superior Court where oral arguments will be heard by Judge Brian Huber on Wednesday. Huber combined the two cases into one last month. Arguments are expected to center on the state’s motion to dismiss the case, and if that motion fails, a motion by the state to relocate the trial to Thurston County.

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