The Association of Washington Cities (AWC) and three city governments are backing Seattle in its fight to enforce its controversial income tax.
The city's tax — a levy of 2.25 percent on income over $250,000 for individuals and over $500,000 for joint filers — was passed by the Seattle City Council in July 2017 and struck down by the superior court in Kunath v. Seattle in November 2017.
Superior court Judge John R. Ruhl held that cities can only impose a given tax if the Legislature has specifically authorized the type of local levy in question, and that Seattle’s tax was not only unauthorized but was also barred under state law prohibiting cities from imposing net income taxes. Seattle petitioned the Washington Supreme Court to review the case.
In an October 25 statement, Peter King, AWC’s CEO, said that while the association “has not taken a position in support of local income taxes,” it wants the superior court opinion overturned in order to support a broad reading of local governments’ tax authority under state law.
“We know locally-elected officials are best situated to serve the needs of their unique communities and make decisions in-line with and in response to their residents’ values,” King said. If upheld, the superior court decision overturning Seattle’s income tax “sets a terrible precedent for local decision-making,” he added.
In their October 17 amicus brief in the case, the AWC and the cities of Olympia, Port Townsend, and Port Angeles claimed that Ruhl was mistaken in determining that Seattle’s tax isn’t allowed because it’s not expressly authorized under state law.
The brief argued that state law — specifically Revised Code of Washington 35A.11.020 — grants cities broad taxing authority, and “that ‘within constitutional limitations, legislative bodies of code cities shall have within their territorial limits all powers of taxation for local purposes except those which are expressly preempted by the state,'" specifically liquor and insurance premium taxes.
“Amici believe the trial court erred . . . in construing that Seattle’s income tax is not authorized because the general grant of taxing power in RCW 35A.11.020 confers no specific authority on Seattle to impose any tax,” the brief said.
The cities that filed the amici brief are also concerned that the trial court ruling will hurt their ability to raise revenues. “Olympia is struggling, as are other Washington municipalities, with societal changes creating funding needs unmet by state and federal authorities,” the brief stated. “Port Townsend recognizes that its home rule authority will be impaired if the trial court’s ruling is affirmed.”
The AWC and cities backed Seattle’s claim that the levy is an “excise tax” on income earned by residents. “Seattle properly argues that its income tax falls within its broad excise authority,” the brief said. If the tax isn’t an excise tax, then it’s a sui generis income tax authorized by the broad authority provided under RCW 35A.11.020, the brief argued.
“Amici submit that Seattle’s personal income tax, whether characterized as an excise tax or a sui generis income tax, is within the express grant of ‘all powers of taxation for local purposes,’” according to the brief. “Amici concur with Seattle’s argument that the trial court’s ruling would render RCW 35A.11.020 meaningless, and it should be reversed.”
The Seattle city attorney’s office declined to comment on the brief. According to the office, Seattle is still waiting for the state supreme court to decide whether to hear the case or send the appeal to a lower court.
Larger Stakes
While the cities' amici brief focuses on the question of local tax authority, the Seattle income tax dispute has drawn a substantial amount of interest from both progressive groups and opponents of higher taxes who see it as part of a larger fight over the future of Washington state’s tax regime — specifically, the end of Washington’s de facto ban on income taxation.
Progressives argue that Washington’s tax regime is too regressive, but progressive income taxation is barred by a 1933 state supreme court precedent treating income as a form of property and thus subject to a constitutional requirement that it be taxed uniformly.
Many of the briefs submitted in the case over the past several months — including the initial and most recent arguments by Seattle and those by opponents — reference the larger constitutional arguments over income taxation in the state. Brian Hodges with the Pacific Legal Foundation, who filed a response brief on behalf of several taxpayer plaintiffs, said proponents of income taxation have unsuccessfully sought seven times to have the court overturn the precedent.
Supporters of Seattle’s tax “know it’s unconstitutional; they [passed it] to get an eighth bite at the apple,” Hodges said. “The crux of their argument is the supreme court got it wrong in 1933 and has continued to get it wrong in subsequent decisions.”
Hodges said his side hopes the court continues its tradition of upholding the precedent. In previous cases, “the court said, ‘No, once we have determined income is property, it’s no longer a question for the courts. If anyone wants to open up new avenues . . . they must take that to the Legislature,’” he said.
The amicus filing period is coming to a close. The city attorney’s office and Hodges said it’s unclear if the supreme court will take the case, but that they anticipate it will make a decision by the end of the year.