The lawsuit comes as President Joe Biden pushes for big increases in federal capital gains tax rates.
Washington is one of a handful of U.S. states that doesn’t levy a personal or corporate state income tax.
Inslee, a Democrat, called the measure an “economic justice legislative package,” when he signed it into law May 4.
“This is a day where Washington state starts to make progress on making our upside-down tax system fairer and more equitable,” the governor said in a statement. “Today, we are taking steps to address this out-of-date system where working families pay a much higher percentage of their income than those who make a lot more.”
State Rep. Noel Frame, a Democrat who chairs the House Finance Committee, praised the new tax for redistributing wealth.
“We are asking the wealthiest Washingtonians to share in the responsibility of funding the needs of our communities and putting money back in the pockets of low-income families. Not only that, but the investments made in child care and education will bolster economic recovery and support the success of Washington’s children.”
According to Inslee, the capital gains tax was first proposed 10 years ago by the left-wing Washington State Budget and Policy Center. With Inslee’s signature, Washington joins 41 other states and the District of Columbia in taxing capital gains.
But the real goal for tax advocates here is to introduce what amounts to an income tax, Maxford Nelsen, director of labor policy for the Freedom Foundation told The Epoch Times in an interview.
The legal complaint in Quinn v. State of Washington was filed in the Superior Court of Washington for Douglas County by the Freedom Foundation, which describes itself as a “non-profit think and action tank with offices in Washington, Oregon, Ohio, Pennsylvania, and California.”
“The left in Washington state has been working to try to pass an income tax for decades, so this is a long-running and very controversial issue,” Nelsen said.
“Voters have consistently rejected efforts to impose an income tax, and our state courts have consistently struck down attempts to impose graduated or progressive income taxes.”
The left has tried to portray the new tax as “something other than an income tax, but it’s widely recognized as being the first step towards a broader income tax proposal in Washington state,” he said.
The Washington State Legislature approved the measure, known as ESSB 5096, to impose a 7 percent tax on long-term capital gains.
“While described as an excise tax on the sale or exchange of long-term capital assets, the tax on capital gains is a tax on income,” the complaint states.
Starting Jan. 1, 2022, individuals will be subject to capital gains tax on their adjusted capital gains during the federal taxable year. Adjusted capital gains are defined by the individual’s federal net long-term capital gain, which is based on the amount of long-term capital gain reported on the individual’s federal income tax return. The measure taxes capital gains income exceeding $250,000 in a year.
Failure to pay the capital gains tax will result in penalties for the individual and possible criminal punishment as either a felony or gross misdemeanor.
The measure violates the state constitution, which prohibits taxes on income that treats earners differently, according to the Freedom Foundation.
“Washington state is coming after your income, one way or another,” Aaron Withe, CEO of the Freedom Foundation said in a separate statement.
“Elected officials are counting on voters assuming the new capital gains income tax will only affect the wealthy,” he said. “But the negative consequences for job creation, entrepreneurship, and the economy will be felt across Washington state.
“By any reasonable definition, capital gains are income, and any attempt to tax it is an income tax,” Withe said. “And because this one treats Washingtonians differently based on income, it violates the state constitution no matter what you call it.
“Capital gains taxes are confiscatory money-grabs by greedy politicians who think they have an automatic claim on other peoples’ earnings.”
A spokesman for Inslee provided a brief comment on the lawsuit.
“Legal counsel will review the filing and respond appropriately,” said Mike Faulk, press secretary for the governor.