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Seattle Income Tax Ruling Sets Stage for Constitutional Fight

Posted on July 17, 2019

A Washington appellate court ruling that Seattle’s income tax ordinance is unconstitutional has paved the way for a possible review of the state’s long-standing, controversial ban on progressive income taxes.

In a July 15 ruling, the Washington Court of Appeals, Division 1, held that although the city has the statutory authority to adopt a net income tax, the graduated income tax ordinance approved by the city in 2017 violates the state constitution's uniformity requirement.

In the ruling, the appellate court disagreed with a November 2017 superior court ruling in Kunath v. Seattle that struck down the city's tax on the basis that it violated a 1984 state law barring cities from taxing net income. The appeals court instead decided that the state law was invalid because it violated Washington's single-subject rule for legislation. 

The appellate court was then free to consider the constitutional question of whether the Seattle tax — a 2.25 percent levy on single earners’ income over $250,000 and on joint earners’ income over $500,000 — was in violation of a 1933 state supreme court precedent banning progressive income taxation in the state.

“Because Seattle enacted a graduated tax on income, it is unconstitutional,” the court said.

The decision sets up Seattle and proponents of the 2017 tax to challenge the 1933 precedent before the Washington Supreme Court. Challenging the precedent is a priority for Washington progressives, who argue that the long-standing decision — which determined that income is property and as such must be uniformly taxed under the Washington Constitution — prevents a more progressive and equitable tax regime in the state.

Notably, the Washington Supreme Court in January declined Seattle's direct appeal of the superior court ruling, instead sending the case to the appellate court for review.

“We’re pleased that the court held the city had the statutory authority to enact an income tax,” said Dan Nolte, communications director with the city attorney’s office. “The city has always recognized that ultimately the supreme court is the proper place to overturn the bad [1933] precedent holding an income tax is a tax on property. We intend to petition our Washington State Supreme Court for appeal.”

The Economic Opportunity Institute, a key proponent of the tax, also praised the decision.

“Having clarified Seattle’s authority to tax income, and cleared away the underlying impediments, we are ready to appeal this decision to the Washington State Supreme Court” to overturn the 1933 precedent, the institute said in a July 15 release. “Seattle has the most regressive tax system of any city in the country, and we will finally have the forum to start correcting that.”

The appellate court's ruling determined that the city’s tax should be treated as an income tax, not an excise tax on living or receiving income in the city or a sui generis tax as Seattle had argued. Justices also rejected the city's claim that the tax was on total income, determining that the ordinance applied the tax to net income.

“Because Seattle’s income tax measures a city resident’s taxable income based on the sum of net calculations, it is a net income tax,” according to the opinion, authored by Judge James Verellen. But while the superior court's 2017 ruling struck down the tax for violating the 1984 state law prohibiting local net income taxes, the appellate court instead sided with proponents of Seattle’s tax ordinance in deciding that the law had been passed in violation of Washington’s single-subject rule, which requires that provisions of legislation be reasonably related and germane.

Noting that the law, passed in 1984 as S.S.B. 4313, concerned rules for “city-county” governments in Washington, the court said provisions of the legislation, including one barring cities and counties from enacting local net income taxes, are “not adequately germane” to each other.

“The only seeming connection between all subsections of the bill was that they generally relate to, as the bill title states, local government. But this general subject is so expansive that literally any set of legislative enactments affecting any aspect of towns, cities, or city-counties would purport to satisfy the rational unity test, thus undermining the purpose of the single subject rule,” according to the decision.

Having determined that the ban on a net income tax is invalid, the court moved to weigh in on the constitutional question that the superior court declined to address in its ruling: whether the tax was a progressive tax on property and was therefore unconstitutional. The appellate court determined that the tax is a progressive income tax and cited the 1933 precedent in declaring it to therefore be a nonuniform tax on property prohibited by the state constitution.

“The complexion of the case has changed because of the court of appeals’ ruling,” said Matthew Davis of Davis Leary LLC, attorney for plaintiff S. Michael Kunath, one of the opponents of the tax. “The basis of the decision was previously statutory, and now the court of appeals has dispensed with the statutory element and decided the case directly under the constitutional” question. “That is the issue the city wanted to get before the supreme court,” he said.

Davis said that because of the way the appeals court ruled, he expects the state supreme court to take the case. However, he said he believes the court will stand behind its 1933 decision, noting that the court has strongly upheld the precedent in previous instances.

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