Washington watchdog group hits Revenue Dept. with capital gains tax rulemaking warning

The Citizen Action Defense Fund, a local government watchdog nonprofit, sent the Washington state Department of Revenue a letter demanding the agency stop its rulemaking activities related to implementing the capital gains income tax.

Douglas County Superior Court Judge Brian Huber ruled March 1 that the capital gains income tax adopted last year under Senate Bill 5096 is an unconstitutional graduated income tax.

State Attorney General Bob Ferguson has since asked the state Supreme Court to take the case on direct appeal, with the high court in July agreeing to hear the case.

“It is black letter law that statutes declared unconstitutional are deemed void ‘from the beginning’ or ab initio – they have no legal effect whatsoever and the law treats them as if they never existed,” CADF Executive Director Jackson Maynard said in the Wednesday letter addressed to John Ryser, DOR acting director. “Despite this, the Department is proceeding with rulemaking and, according to its website, the new rule could be adopted as soon as ‘the 4th quarter of 2022.’ I understand that the State has appealed this matter and the state supreme court has accepted jurisdiction. However, the State did not seek a stay of the lower court order on appeal so it is therefore still in full force and effect.”

Last month, DOR Communications Manager Mikhail Carpenter explained the department’s reasoning for moving ahead with rulemaking to the Washington Policy Center’s Jason Mercier.

“The Legislature tasks the Department with the implementation of its tax laws and the Department must be ready and prepared in the event that the Superior Court’s decision is overturned,” Carpenter said in an email to Mercier. “The Superior Court’s decision is not a final decision, especially in light of the acceptance by the state Supreme Court to consider the appeal.”

In the letter, the Maynard demands the department stop rulemaking until either a court reverses the lower court ruling or issues a stay, while also seeking public records related to the timing and implementation of rulemaking due to concerns “that political pressure may have been brought to bear on the Department.”

“These requests concern a matter of great public importance and a speedy response would be appreciated,” Maynard concluded in the letter. “I therefore look forward to receiving your response within five days of the date of this letter. Please be advised that if the Department persists in implementation of SB 5096 that CADF will take whatever actions it deems necessary in accordance with the law to protect the public interest in our state.”

The Center Square reached out to Maynard about those potential actions.

“We are exploring all options to ensure that the department follows the law,” he said via email.

The Citizen Action Defense Fund was founded in the wake of the COVID-19 pandemic with the goal of advancing free markets, restraining government overreach, and defending constitutional rights.

Last month, Maynard – who continues to serve in his current role as general counsel of the Building Industry Association of Washington – was announced as the organization’s executive director.

The state Supreme Court is expected to rule on the constitutionality of the capital gains income tax this winter.