Washington state is a rare blue state that has grown by leaps and bounds in recent decades thanks to the tech corridors in Seattle and facilitated by an income tax rate of zero. That’s right: Washington is one of nine states that has never had an income tax. And these states—a group that includes Florida, Tennessee and Texas— have had the biggest inflow of people, capital and jobs from other states.
But last year the state opted for a sneaky “soak the rich” income tax scheme of imposing a tax on capital gains income. Capital gains taxes have always been considered income taxes — and therefore this tax directly violates the state’s constitution which prevents such levies.
Liberal lawmakers cleverly devised a way around the constitution by mangling the English language and calling this revenue raiser an “excise tax” imposed on the transaction that generates a capital gain, not the income itself.
Except the state lawmakers appear to be too clever by half in their tax gambit. Here’s the problem: if the tax is really an excise tax, it clearly violates the commerce clause of the Constitution. That clause prohibits one state from imposing a tax on a transaction outside of its borders. For example, Maryland could not impose a tariff on goods coming in to the state from Virginia if the transaction didn’t happen in Washington and doesn’t affect a Washington-based business directly.
Why should anyone outside of Washington care one way or the other? Because, as the Washington Policy Center, which has been fighting this tax scam for years, explains: allowing states to impose an interstate excise tax “threatens to wreak havoc on taxpayers and businesses around the country.”
This is why the Supreme Court needs to take this case and rule against the predatory tax. If the Court doesn’t, then it will be Johny bar the door as states rush to collect “free money” by taxing out of state transactions. The Wall Street Journal has summarized the Supreme Court imperative well: “A Court rebuke would remind states to stay in their lanes with taxes and regulations.” America is rich in no small part because our founders created the world’s largest (50-state wide) free trade zone.
By the way, the justices would be doing Washington residents a big favor by striking down this unconstitutional tax. Washington consistently ranks as a pro-growth and pro-business state largely because of its no-income-tax policy. With this back door income tax, Washington risks becoming another California — which is now, for the first time ever, seeing a net loss of people and businesses driven out by high taxes.
When states try to “sock it to the rich,” suddenly they find the rich aren’t there to tax anymore. Just ask Jeff Bezos of Amazon — who just moved with his 100 billion of wealth from Seattle to zero-income tax Florida.
Stephen Moore on November 5, 2023
