NRPLUS MEMBER ARTICLE F or years, the Washington State Department of Commerce ran a “Choose Washington” webpage encouraging businesses and entrepreneurs to locate in the Evergreen State. From 2012 to 2015, the page highlighted Washington’s “competitive advantages” and included “no taxes on capital gains or personal or corporate income taxes.” In May of 2015, that language was changed to highlight “no personal or corporate income tax” in the state. By 2021, the language citing no income taxes as an advantage was gone.

And then on March 24, 2023, the state supreme court ruled that the state’s new capital-gains tax was not an unconstitutional income tax as the state superior court had ruled, but a constitutional “excise tax” as advocates, including the governor, claimed. To reach this decision the state high court had to side against the IRS, the revenue departments of the 49 other states, the practices of other nations, tax experts around the country, and the plain meaning of the language involved.

In a nutshell, capital gains are income above the initial investment. A capital-gains tax is a tax on that income gain. An excise tax is a tax on a transaction. The thing being taxed in Washington State is the net gain above $250,000 — very specifically targeting income, making it an income tax by definition. This is why, when Congressman Dan Newhouse (R., Wash.) asked the IRS what kind of tax a capital-gains tax is, the response obtained was, “It is an income tax.”

Washington State has a constitutional prohibition against graduated property taxes of any kind, and defines property as “anything tangible or intangible subject to ownership” which puts income firmly in this protected category. More accurately, it used to put income firmly in this category.

The court didn’t completely throw out past precedent, which has kept the state free of income taxes every time the issue has gone to court for the past century (the people also did their part in rejecting income taxes of any kind at the ballot box ten times — including six proposed constitutional amendments). However, the cognitive contortions required to arrive at their conclusion that a tax based on income is not an income tax (an acknowledgment of sorts that the precedent still exists) have placed this constitutional protection in, to put it judicially, a grey area.

It’s Washington State vs. the world when it comes to defining income taxes, which is a position many Washington progressives are celebrating now. Before this tax was even declared “constitutional,” there were proposals to increase the tax rate from 7 percent to 9 percent and create “wealth taxes” on Washington’s elite. Now that the court has ruled, there’s a newly proposed tax on “excess compensation” for doctors and administrators at hospitals, and the city of Seattle is kicking the tires on a local “excise tax” on income of its inhabitants.

Part of income-tax advocates’ celebration of this successful end-run around constitutional restrictions and voter decisions comes with the obligatory lament that Washington’s tax system, with its sales tax and no graduated income taxes, is regressive and unfairly burdens the poor. Yet those in power who are among the loudest at denouncing this unfair burden are also the key obstacles to reducing it. The state sales-tax rate, which burdens lower-income families more than others, has not been cut since Fast Times at Ridgemont High and Rocky III dominated at the box office. When confronted with this fact prior to the current legislative session, majority leadership reiterated their concern to aid those in need, but insisted on targeting and controlling how that relief would be administered and the form it would take when distributed and delivered.

To put this hesitation in context, Washington State’s tax revenue has increased 150 percent in twelve years. It has enjoyed record tax-revenue surpluses totaling more than $15 billion over the last couple biennia. Inflationary pressures and pandemic aftermath have carved away at residents’ savings, yet the state can find no room for broad-based tax relief, despite regular lip-service for the need to reduce the tax burden on poor and middle-income families.

Instead, all this record revenue is leading to calls for more taxes and removal of the no-income-tax status that was once hailed as a “great marketing” tool by the state’s own commerce department.

This is no accident. Emails obtained by Washington Policy Center made clear that the goal of the capital-gains tax was to generate a lawsuit that would allow a new, more progressive court to break the shackles of past precedent and pave the way for broad-based income taxes by simple majority vote.

So far, their strategy is working, but one giant obstacle remains: the people. Washington voters have said no ten times in a row. Income-tax advocates are now hoping the political camouflage offered by a name change from “income tax” to “excise tax” will be enough to chalk up their first win.

With the state’s definition of “what makes an income tax” now unclear, some Washington businesses are pulling up stakes. “In honor of the Washington State Supreme Court’s wisdom and knowledge of the law,” Fisher Investments sarcastically declared in a statement, “and in recognition of whatever it may do next, Fisher Investments is immediately moving its headquarters from Washington state to Texas.”

Washington State’s income-tax advocates think they’ve won a big one and have what they want for now : a conveniently convoluted definition of excise taxes that places the state at odds with the world.

Meanwhile, states across the country are finding ways to reduce tax burdens in the midst of high inflation and the aftershocks of the pandemic. From Hawaii to New York, Democratic- and Republican-led states have provided (or are providing) relief in the form of refunds and cuts to state income-tax rates — corporate rates, individual rates, or even both. This phenomenon includes “Trifecta” states in which Democrats control both chambers of the legislature and the governor’s mansion, such as California, Maine, New Jersey, and even Washington’s neighbor, Oregon.

The inconvenient truth for Washington State’s income-tax advocates is that in a post-Covid era in which workplaces are more flexible than they’ve ever been, people and companies have options. States are competing for their business. And when it comes to Washington’s high-tech, high-value entrepreneurs, states such as Texas and Florida are waiting with open arms and lower costs of living. The “big victory” for Washington State’s income-tax advocates is a surrender of a key competitive state advantage for a high-tech future of innovation and prosperity, all for revenue the state doesn’t need.