While we wait for the capital gains tax lawsuit to find its way through the courts, the University of Washington Law School posted an interesting video entitled “Three Minute Legal Advice: Capital Gains Tax.” The video is a short interview with Professor Scott Schumacher, Director, Graduate Program in Taxation. These comments by Professor Schumacher were particularly noteworthy:
“A capital gains tax is just a tax on a certain type of income. . . As far as it is an income tax and I think it is found to be unconstitutional. ”
These comments from a tax law professor who calls a capital gains tax an income tax come as no surprise. From the IRS to every other state in the country to tax professionals around the world, the analysis is the same: a capital gains tax is an income tax. A very volatile income tax at that.
The extreme volatility of capital gains taxes is so well known that Attorney General Bob Ferguson stressed the tax’s unpredictability to dismiss the lawsuits. From the Attorney General’s letter:
“Plaintiffs currently have no way of knowing whether they will sell investments and make capital gains in excess of $ 250,000 in a future year. For example, even if they currently own stocks that have risen in value more than $ 250,000, they have no way of knowing what the value of those stocks will be in 2022 or beyond when the tax goes into effect. Last year alone, the stock market fell by almost 30 percent in less than a month; between 2007 and 2008 the stock market fell by around 50 percent; and from 2001 to 2002 the NASDAQ index declined over 75 percent. As these examples show, plaintiffs have no way of knowing the future value of their non-exempted capital assets. Hence, plaintiffs have no way of knowing that unless plaintiffs claim clairvoyance (which would pose their own problems), they will be selling unexempted investments with a profit of more than $ 250,000 in a future year.
If claimants are clairvoyant, what does that mean for state capital gains tax assessments?
One of the leading attorneys in the current litigation, former Attorney General Rob McKenna, gave an update on the case in this Lens podcast interview today.
As the dispute progresses, several cities are also working to make it clear to their citizens and businesses that they will not levy any income tax, at least at the local level.