Amicus Brief: Quinn v. Washington

Hoping to raise revenue to “provide every child in the state with an education” and rebalance what some in Olympia saw as the “most regressive” tax system in the country, the Washington state legislature in 2021 enacted a 7% long-term capital gains tax that exempts the first $250,000 per year. But the state constitution mandates that all taxes on “property,” which includes income as a matter of state law, must be uniform and capped at 1%. To get around these limits, the new tax is an “excise” tax—imposed on “the sale or exchange” of long-term capital assets, not on the income generated. That strict formalism seems dubious on its own terms; all 41 other states with capital-gains taxes treat them as income taxes. But the state supreme court held that the new tax is what it says it is—an excise tax—and thus permitted under state law. Even if that solved the state-law problem, however, it created a federal-law problem. By its terms, the new excise tax reaches beyond Washington’s borders to tax transactions that occur entirely in other states involving property located entirely out of state.

The U.S. Supreme Court long ago held that it is “beyond the power of the state” to impose a tax when “the taxable event is outside its boundaries,” Memphis Nat’l Gas Co. v. Stone (1948), and it “ha[s] not abandoned the requirement that, in the case of a tax on an activity, there must be a connection to the activity itself, rather than a connection only to the actor the State seeks to tax,” Allied-Signal v. Director, Division of Taxation (1992). In other words, a state may tax its residents’ income earned from out-of-state transactions, but it can’t tax the out-of-state sales themselves.

In addition to conflicting with bedrock constitutional principles, Supreme Court precedents, and a Ninth Circuit en banc decision, the Washington Supreme Court ruling opens a Pandora’s box of dangerous practical implications on a national scale. Utah could impose a roaming excise tax that applies anytime one of its residents buys or sells alcohol anywhere. California could do the same for non-electric vehicles. If personal nexus suffices, then states could impose property taxes even for goods that never come home.

The Manhattan Institute has now joined 12 other groups on a brief authored by former Washington attorney general Rob McKenna that supports a petition asking the U.S. Supreme Court to take the case. It discusses implications of this tax mechanism on interstate economic competition and federalism, and shows how much of an outlier Washington state would be if this tax were allowed to stand.

Ilya Shapiro is a senior fellow and director of Constitutional Studies at the Manhattan Institute. Follow him on Twitter here.

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