Seattle’s tax on wealthy households is unconstitutional and should remain off the books for now, the Washington state Court of Appeals ruled Monday.
But Seattle and other Washington cities are allowed to tax net income as a matter of law, the Court of Appeals also determined in its significant ruling, declaring void a 35-year-old ban enacted by the Legislature and opening the door to a battle at the state Supreme Court that could have far-reaching consequences.
Washington is one of the few states in the country without a graduated income tax or any income tax, and the state’s system has been labeled the most regressive in the country by tax-reform think tanks, meaning poor residents pay a much higher percentage of their earnings than rich residents.
Matthew Davis, lawyer for one of the Seattle residents opposing the city’s income tax on well-off households, said this of the Court of Appeals’ decision to nix the Legislature’s 1984 ban: “I was giving that argument a zero percent chance of success.”
“This is a very positive ruling and that sets the stage for the state Supreme Court to take up Seattle’s tax on the affluent,” said John Burbank, executive director of the Economic Opportunity Institute, which pushed for the tax partly as a legal test case.
First, the city’s opponents have argued the tax violates that 1984 law banning Washington cities from taxing net income. A King County Superior Court judge sided with the opponents on that point, killing the tax before the city had begun collecting the money.
Seattle had estimated the measure would raise about $140 million per year to pay for housing, education and transit and to reduce other, more regressive taxes.
Second, the opponents have argued the tax violates a provision of the Washington Constitution that says property must be taxed uniformly — at the same rate for everyone. The lower-court judge didn’t need to address that point.
Seattle sought direct review from the Supreme Court, which declined to hear the issues right away and instead punted the case to the Court of Appeals.
On Monday, the Court of Appeals weighed in, reaching a different conclusion than the lower-court judge. Though Seattle’s measure does violate the ban on cities taxing net income, the ban itself is unconstitutional because the Legislature breached a somewhat technical rule in 1984, the Court of Appeals determined.
The Legislature included the ban in a law that also covered multiple other subjects, breaking a constitutional rule that says “no bill shall embrace more than one subject,” according to the Court of Appeals. Besides municipal taxing authority, the law also dealt with independent school districts and with collective bargaining rights for police officers.
“No statutory prohibition limits Seattle’s authority to levy a property tax on income,” Judge James Verellen wrote for the Court of Appeals.
On the questions of whether Seattle’s tax is constitutional, the Court of Appeals deferred to the state Supreme Court, which has several times in the past ruled that income is property and that property must be taxed uniformly.
Seattle’s tax applies a 2.25% rate on total income above $250,000 for individuals and above $500,000 for married couples, meaning households with less money aren’t taxed at all.
“We are constrained … to follow our Supreme Court’s existing decisions that an income tax is a property tax,” Verellen wrote. “Our state constitution’s uniformity requirement bars Seattle’s graduated income tax.”
Seattle now intends to again ask the Supreme Court to review the case, said Dan Nolte, spokesman for Seattle City Attorney Pete Holmes. With the statutory question cleared by the Court of Appeals, the city will try to persuade the Supreme Court to overturn past rulings on the constitutionality of taxing income.
Burbank said he’s confident the Supreme Court will now agree to hear the case.
“We’re pleased that the Court held the City had the statutory authority to enact an income tax,” Nolte said in a statement.
“The City has always recognized that ultimately the Washington State Supreme Court is the proper place to overturn the bad precedent holding an income tax is a tax on property.”