Seattle City Attorney Pete Holmes settled a public-records lawsuit this month with a conservative think tank, and in doing so turned over a legal memo showing his office had advised the City Council in 2014 that cities don’t have authority under state law to impose an income tax.
Nonetheless, the council unanimously passed the so called “wealth-tax” measure less than three years later, triggering a legal challenge that led a King County judge to strike down the ordinance in late 2017. The city has since appealed the ruling, with a hearing before a three-judge panel of Washington’s Court of Appeals set for June 6.
In the 2014 memo, Assistant City Attorney Kent Meyer advised then-Councilmember Nick Licata of “barriers to prevent any city from imposing an income tax.” The legal advice came as the council considered an earlier idea to impose a so-called “millionaire’s tax” floated by Councilmember Kshama Sawant.
“The legislature has not granted cities the authority to impose an income tax,” Meyer wrote in the memo. “In fact, the legislature has specifically prohibited cities from imposing a net income tax … Even if that statute did not exist, the City would still need an express grant of authority from the legislature to impose a net income tax.”
The memo is significant to the case now under appeal because it clearly shows the City Attorney’s Office advised that an income tax was unlawful before the council eventually passed such a measure, according to Jason Mercier, director of the Center for Government Reform at the business-backed Washington Policy Center, which brought the public-records suit against the city.
“This is Seattle’s own attorney telling the City Council this is illegal, you don’t have the authority to do this, and yet they did it anyway,” Mercier said. “It’s pretty shocking.”
But the City Attorney’s Office said in an email Friday the memo is irrelevant to the current case because it reflects legal advice about a different proposal from the measure that was ultimately adopted.
“The 2014 memo that was released provided legal guidance regarding an early idea to tax net income,” Deputy City Attorney John Schochet said. “Three years later, after considering a number of ideas and intervening case law developments, the City Council unanimously adopted legislation on a different proposal, which established a tax on total income.”
Rob McKenna, who represents a group among various plaintiffs challenging the city’s measure, countered Friday that the 2014 memo “reinforces our arguments.”
“The City Attorney’s memo reads like it’s citing our legal briefs, frankly,” McKenna said. “It confirms all of the arguments that we’ve been making all along, which is good to see.”
In a Seattle Times podcast interview earlier this month, prior to the memo being made public, Holmes defended the city’s legal case.
“We know there is really bad, erroneous, embarrassing, outlier case law that our Washington Supreme Court needs to correct,” Holmes said, referring to past rulings which have repeatedly said the state constitution bans a graduated income tax.
That legal precedent goes back nearly a century to a state Supreme Court decision that defined income as property, which under the state constitution must be taxed at a uniform rate. “The notion that income is property has been abandoned by essentially every other jurisdiction in this country. It’s bad law,” Holmes said.
But Seattle’s law was struck down in 2017 in a court ruling that didn’t even get to the constitutional question, because a judge ruled the city ordinance violated a state law banning cities from enacting taxes on net income.
Still, Holmes contended this month, “We think we actually have the winning argument” on that state ban. He offered a philosophical defense.
“Is the same rule that applies in Enumclaw the appropriate one to apply in Seattle? I think that’s one of the disconnects I have.”
As passed by the council in July 2017, the measure seeks to apply a 2.25 percent tax on total income above $250,000 for individuals and above $500,000 for married couples filing their taxes together. Then-Mayor Ed Murray called it “a new formula for fairness,” as he and other city officials said the measure aimed to eliminate the state’s overreliance on regressive sales taxes and ensure the wealthy pay their fair share.
Even before the council passed the law, opponents argued the tax would violate the state law and the state constitution. Yet city leaders pushed the measure as a test case challenging the state’s regressive tax structure, expecting the issue ultimately to be decided by the state Supreme Court.
Private citizens and organizations immediately challenged the tax. After they won the ruling in King County court, the city sought a direct review by the Supreme Court. The high court declined to immediately review the case, sending it to the appeals court, where the case is now.
The City Attorney’s Office has spent about $249,000 to date to defend the income tax measure, with about $214,000 going to the Pacifica Law Group, a private Seattle-based firm contracted to help with the case, a spokesman for the office said.
In September, the Washington Policy Center (WPC) separately sued the city for withholding the 2014 memo and other records in response to a request for records related to city income-tax discussions. The city initially had redacted the memo, citing “attorney-client” privilege. It also cited “spousal privilege” for withholding emails that Councilmember Sally Bagshaw exchanged in 2017 with her husband about the legality of an income-tax measure.
The think tank sued, contending the city effectively had waived its attorney-client privilege by providing the memo to the private, third party Economic Opportunity Institute. WPC also challenged the city’s use of spousal privilege as an exemption under the Public Records Act for Bagshaw’s emails.
“Spousal privilege doesn’t exist as an exemption,” Mercier said.
Under the settlement, which was finalized on April 9, the city agreed to turn over the disputed records and pay the WPC’s legal fees of $9,242.
“The City Councilmembers unanimously agreed to release the memo unredacted rather than use City resources to fight over access to an irrelevant memo regarding an idea that was not adopted,” said Schochet, the deputy city attorney.
Correction: This story has been updated to reflect that the Washington Policy Center contended in its lawsuit that the city, not the city attorney’s office, waived its attorney-client privilege for the 2014 memo by providing it to a third party.