Individual Income Insights: Will Seattle’s Newly Imposed Income Tax Survive Legal Challenges?


 Seattle

Washington is one of only seven states that does not impose a personal income tax. But soon not all Washingtonians will enjoy this benefit. On July 10, the Seattle City Council unanimously approved an income tax on high income earners with the passage of Ordinance 125339. Under this legislation, starting Jan. 1, 2018,  Seattle individuals who earn over $250,000 and married couples who earn over $500,000 will be taxed at a rate of 2.25 percent for any income earned in excess of those totals.

The law quickly met opposition and multiple lawsuits have been filed challenging its legitimacy. Given Seattle’s legal landscape, in order for the tax to stand it will have to overcome three main legal hurdles. First, a state law enacted in 1984 restricts cities from levying a tax on net income. Second, Article VII, Section 9 of Washington’s state constitution requires taxes levied by cities to be uniform within a class of property, thus, only taxing income over a certain threshold violates this restriction. Also under Article XI, Section 12, the state legislature must expressly grant the authority to a city to impose a tax; the legislature has not given Seattle this authority to impose an income tax. On Sept. 29, the city of Seattle filed a motion for summary judgment for the suits and addressed these legal concerns.

First, the city argues that the “law taxes resident’s total personal income, not net income,” and thus, the 1984 law is not applicable. Specifically, according to the motion, net income under Black’s Law Dictionary is defined as “‘[t]otal income from all sources minus deductions, exemptions, and other tax reductions.’” However, Seattle’s ordinance taxes “total income,” which is defined in the ordinance as “the amount reported as income before any adjustments, deduction, or credits” (emphasis added).

Second, Seattle argues that the constitutional uniformity requirement for taxes within a class of property should not apply because the 1930s cases which hold that income is property are “faulty” and should be overturned. For example, in Culliton v. Chase the Washington Supreme Court held that income is property and thus, an income tax is a property tax. Therefore, since the newly imposed tax only taxes income over a certain threshold, it is not uniform within the class. However, Seattle argues that this case and others supporting it should be overturned because they “relied on case law that is no longer valid, incorrect statements of the law, and unfounded conclusions.” Thus, the restriction should not apply to the newly enacted tax.

Third, the city argues that they have the state legislature’s authority to impose the tax because the personal income tax is “best characterized as an excise tax, or perhaps sui generis.” If the tax were characterized as one of these types of taxes, then the city would be authorized to impose the tax as they have been “granted broad authority to enact non-property taxes.”

Only time will tell how the courts will rule on the legality of Seattle’s newly imposed income tax. The King County Superior Court has scheduled a hearing on the matter for Nov. 17.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think Seattle’s income tax on high income earners will survive its legal challenges?

Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.