TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, August 12, 2017

Two More Suits Filed to Block Seattle’s New Income Tax

Tax The RichSeattle Times, Two More Suits Filed to Block Seattle’s New Income Tax:

More than a dozen Seattle residents represented by the conservative Freedom Foundation sued the city Wednesday over its new income tax on wealthy households.

In addition, five residents whose legal team includes former Republican state Attorney General Rob McKenna and two former state Supreme Court justices sued to block the tax.

There are now three lawsuits against Seattle’s tax, the first brought last month by investment manager Michael Kunath. Although each challenge is beginning in King County Superior Court, City Attorney Pete Holmes said the overall issue could be taken up and resolved by the state Supreme Court as early as 2018....

Passed by unanimous vote this past month by the City Council and subsequently signed into law by Mayor Ed Murray, the Seattle measure is a 2.25 percent tax on total income above $250,000 for individuals and above $500,000 for married couples filing together.

Proponents and opponents alike expected the tax to be quickly challenged in court.

The Freedom Foundation plaintiffs, some of whom expect to be subject to the 2.25 percent rate, include Fremont developer Suzie Burke and Aurora Avenue North businesswoman Faye Garneau. Burke and Garneau are major property owners.

They claim the tax violates state laws and the state constitution. And they say the council had no authority to impose the tax without putting it to a vote of the people....

The Opportunity for ALL Coalition plaintiffs, like the Freedom Foundation plaintiffs, claim the city cannot impose the tax, which they say was promoted “under the false pretense that it will tax only the ‘wealthiest residents.’ ” They say the measure also will affect people of more modest means who sell their homes or businesses.

“Contrary to its billing,” their lawsuit says, the tax “reaches well into Seattle’s middle class in unexpected ways,” such as boosting rents by driving up property costs....

The push for the tax began in February, when local nonprofits and labor unions calling themselves the Trump Proof Seattle coalition began a campaign. The coalition said revenue from the tax could offset federal funding cuts by the Trump administration.

The proponents also said the measure would serve as a legal test case for taxing income in Washington, possibly opening the door to a fairer tax system statewide.

Because there are no income taxes in Washington, the state and its cities rely heavily on property and sales taxes, resulting in a system labeled among the most regressive in the nation, meaning people with lower incomes pay a much greater percentage of what they have.

Other than offsetting federal cuts, Seattle’s ordinance says revenue from the income tax could be used by the city to: lower property taxes and other regressive taxes; address homelessness; provide affordable housing, education and transit; create green jobs and meet carbon-reduction goals; and administer the tax.

The city has estimated the tax would raise about $140 million a year while costing $10 million to $13 million to set up, plus $5 million to $6 million a year to administer.

Though Seattle’s economy is booming, the city is struggling with homelessness and affordable-housing crises, supporters of the tax say. The Opportunity for ALL Coalition suit says the tax is unnecessary because the boom is bringing in plenty of revenue.

The various lawsuits against the tax will likely be consolidated and assigned to a single King County Superior Court judge, McKenna said Wednesday....

State law

Much of the legal battle will involve state law.

Opponents say cities only have taxing authority expressly granted by the state Legislature, and they point to a 1984 law that prohibits cities from taxing net income.

Seattle’s ordinance, meanwhile, cites a state law giving the council “all powers of taxation for local purposes except those which are expressly pre-empted by the state.” The city likely will argue that taxing total income is different from taxing net income. 

Seattle law also could come into play, with opponents saying the city lacks authority under its own charter to impose the tax; charter amendments must be voter-approved.

The most significant questions, however, may be those related to the state constitution, which says taxes must be uniform within a class of property.

Opponents say that income is property and that taxing only some households wouldn’t be uniform. In the 1930s, the state Supreme Court nixed a voter-approved income tax.

The Freedom Foundation plaintiffs also say the reporting requirements associated with the Seattle tax would violate their privacy rights under the state constitution.

Backers of the tax disagree. They say circumstances have changed since the Great Depression and note the court today has a different makeup....



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Hopefully, this lawsuit won't be settled until after the tax has been in place for at least two years. Evaluating the impact of taxes at the state level is hard. States differ too much to establish patterns. Comparing a city and almost identical communities next to it are much more meaningful. We're already getting data from Seattle's increased minimum wage compared to its suburbs. It'll be interesting to see what the impact of a higher income tax will be.

To give an example, will major surgeries move from Seattle's Capitol Hill hospitals to those outside the city? I assume under this tax, surgeries done outside the city—or at least those done by physicians who live outside the city—won't be hit with this tax. Keep in mind that includes all the specialities involved in heart surgeries not just the surgeons. Fewer surgeries also means less work and less pay for other Seattle staff. The excellent Swedish Hospital could be particularly hard hit.

"Oh what tangled webs we weave, when first we practice to tax excessively."

Posted by: Michael W. Perry | Aug 13, 2017 10:11:18 AM

Michael, I believe the Seattle tax would be levied on residents of the city (like in NYC) and not on income earned while working there (as is the case with Philadelphia). If it were the latter, thing of all the tax money that would be generated from Amazon employees, starting with Jeff Bezos.

Posted by: PaulB | Aug 13, 2017 4:53:13 PM