Capital gains lawsuit will remain in Douglas County court

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WATERVILLE — A Douglas County judge on Friday rejected arguments by the state of Washington to dismiss a lawsuit over the newly-created capital gains tax, and declined to move the case to an Olympia courtroom.

In a written order, Superior Court Judge Brian Huber said the lawsuit brought by multiple plaintiffs can challenge the constitutionality of the capital gains law passed by the Legislature and taking effect on transactions in 2022. The measure, called an excise tax by the state, would tax 7 percent of annual long-term capital gains on the sales of stocks and bonds that exceed a $250,000 annual threshold. The state says it will affect less than 0.25 percent of the population. 

But the plaintiffs, a group of several wealthy Washington residents joined by the Washington Farm Bureau and the Freedom Foundation, argue that the state constitution renders any income tax, including a capital gains tax, illegal in the state under case law going back to the 1930s.

The Washington Attorney General’s Office had argued that the twin lawsuits filed in Douglas County in April and May — later joined into a single case — were overly speculative, since no taxpayer has yet been billed under the law and therefore the plaintiffs couldn’t prove they had been damaged by it. The plaintiffs lawyers — among them former Attorney General Rob McKenna — replied that Washingtonians with large capital assets are already having to plan for how to dispose of them in light of the oncoming tax structure, or whether to move out of state to avoid paying when they do sell assets.

Both sides characterized any future damages as “hypothetical facts,” but Huber ruled that such claims can be valid under relevant state court rules and precedent, when deciding whether to dismiss a lawsuit before going to trial.

“The Plaintiffs in these consolidated cases, including the Washington Farm Bureau, have asserted that they themselves — or in the case of the Washington Farm Bureau, at least some of its 46,000 members — own property that is subject to the new tax statute and will be taxed if and when the property is sold. They have also asserted that the mere existence of the new tax statute has already lowered the market value of their property and forced them to make tax planning decisions that impact their financial interests in a way that is concrete and non-speculative. This Court finds no basis to suggest that these allegations are unreasonable, and … must assume the Plaintiffs’ allegations are true.”

Huber also set aside the state’s motion to shift the case to Thurston County Superior Court, saying it’s not clear the case would be best served by changing venue.

“… No valid reason has been presented by the State to overcome the presumption that the Plaintiffs in this case are entitled to choose the forum for deciding the case,” Huber wrote.

No date for further hearings has yet been set.

The conservative Freedom Foundation was first to file a lawsuit in Douglas County last April, representing Douglas County resident Chris Quinn and six other wealthy plaintiffs, including Maryhill Winery owner Craig Leuthold, Seattle property magnate Suzie Burke, and former E*Trade boardmember Lewis E. Randall of Freeland. In May, Orondo orchardist and Chelan-Douglas Farm Bureau president April Clayton filed a second suit, joined by eight other individual plaintiffs plus the Washington Farm Bureau. Huber ordered the two lawsuits combined into one in July.