OLYMPIA, Wash. – The Washington State Supreme Court heard arguments on Thursday, January 26th, in a lawsuit brought by opponents of Washington’s new capital gains tax.

Opponents of the tax call it an income tax that is illegal under the state constitution.

“The capital gains tax is unconstitutional for three independent reasons, which this court need only reach one to invalidate the tax,” said lawyer Callie Anne Castillo. “The tax is a non-uniform property tax on individual income, it violates the state privileges and immunities clause, and it burdens interstate commerce in violation of the United States commerce clause.”

Lawyers for the state say that is not the case.

“The court has held many times that a transaction can be taxed even if it generates income,” said Council for the State Noah Purcell. “So, for example, the real estate excise tax. When someone sells real estate, whether it’s their home or rental property, they obviously earn income from selling that property.  But nonetheless they owe the real estate excise tax on that transaction. When a small business owner, like a plumber or an accountant, earns income from their small business they nonetheless, they own the small business and occupation tax on their business’s income.”

The legislature passed and Governor Jay Inslee signed the tax into law last year.

It imposes a 7% tax on profits over $250,000 in sales of assets like stocks and bonds.

It does not apply to sales of real estate, retirement accounts, livestock, timber or small businesses.

Revenue from the tax is earmarked for early childhood education.