Seattle to weigh income tax on wealthy households; here’s how that would work

Seattle residents would pay a 2 percent tax on annual income above $250,000, under a proposal the City Council will begin considering this week.

Married residents filing their taxes jointly would pay it on income above $500,000.

Those details are included in a draft ordinance that Councilmember Lisa Herbold made public Monday. The council will hold a public hearing on the bill at 5 p.m. Wednesday at City Hall.

“Seattle is a growing and prosperous city that can offer great schools, good jobs and healthy communities for all,” the draft ordinance says. “However, Seattle faces many urgent challenges, including a homelessness state of emergency” and other issues.

The council estimates that tax would raise about $125 million annually and says fewer than five percent of the city’s households would pay.

There were about 11,000 individuals in Seattle with earned annual incomes of at least $250,000 in 2015, according to U.S. Census Bureau data.

The council took its first step toward enacting a local income tax in May, when it passed a resolution expressing the city’s intent to adopt by July 10 an “income tax targeting high-end households,” and Mayor Ed Murray supported the move.

But the resolution left undetermined a number of important details, such as what kind of income would be taxed, which households would be considered high-end, what the tax rate would be and how revenue from the tax would be spent.

The resolution said the council would begin considering an ordinance by May 31, which didn’t happen. Herbold and her colleagues needed two weeks more to prepare.

The council members now have less than a month to debate, fine tune and vote on the bill, if they want to meet their self-imposed July 10 deadline. Anything they pass likely would be challenged in court, because foes claim an income tax shouldn’t be allowed.

Though thousands of local governments across the United States have local income taxes, there are no existing income taxes in Washington, locally or statewide.

The state constitution requires taxes to be uniform within the same class of property, and the state Supreme Court has, in the past, ruled that income is property.

Furthermore, the state Legislature passed a law in 1984 prohibiting counties and cities from taxing net income.

Proponents of a Seattle income tax argue that today’s state Supreme Court could interpret the constitution differently and say the city’s proposal could be considered legal.

The draft ordinance starts by laying out a rationale for the tax. In addition to homelessness, it says, Seattle’s challenges include an affordable-housing crisis, increased demand for city services, racial achievement gaps in education, escalating threats from climate change and potential reductions in federal funding.

Washington state’s existing tax system requires poor households to pay a much greater share of their income to state and local taxes than do wealthy households, it says.

“Regressive taxes such as the sales tax unfairly burden those who are least able to pay,” the bills says, arguing the system puts strain on those households, deepens poverty, disproportionately harms communities of color and reinforces inequality.

Only residents would be subject to the new tax: Wealthy people doing business in Seattle but living outside the city for more than half the year wouldn’t pay.

Single residents and married residents filing separately would pay the tax on annual income above $250,000. They wouldn’t be taxed on their income up to $250,000.

The rate would be 2 percent for everyone paying the tax, so a single person making $251,000 would be taxed $20 (2 percent of $1,000), and a single person making $1 million would be taxed $15,000 (2 percent of $750,000).

For married residents filing jointly, the income trigger would be $500,000, rather than $250,000.

The levels of $250,000 and $500,000 would be automatically adjusted each year based on changes in the prior year’s consumer price index for the Seattle area.

The tax would first apply to income received after Jan. 1, 2018, and would first be collected in 2019.

The use of revenue from the tax would be restricted to:

• Lowering property taxes and other regressive taxes

• Replacing funding cut by the federal government

• Providing public services, such housing, education and transit

• Creating green jobs and meeting carbon-reduction goals

• Implementing and administering the new tax

The recent push for an income tax began in February, when a coalition of local nonprofits and labor unions launched a campaign called Trump Proof Seattle.

Portraying the effort as a response to the threat of federal funding cuts under President Donald Trump, the coalition initially discussed a 2.5 percent tax on the unearned income — capital gains, interest and dividends — of wealthy households.

Because allies have been pursuing a capital-gains tax at the state level, the coalition now is supporting a tax more like the proposal outlined in the council’s draft ordinance.

Trump Proof Seattle said a 1.5 percent tax on income above $250,000 could raise more than $125 million per year in Seattle.