Legal Challenges Mounting to Seattle ‘Rich’ Tax

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Paul Shukovsky

There are now three lawsuits challenging the statutory and constitutional underpinnings of Seattle’s newly passed income tax on high-earners.

Two lawsuits were filed Aug. 9 seeking to overturn the measure, enacted in July, that imposes a 2.25 percent tax on the “total income” of single filers making more than $250,000 and joint filers making more than $500,000 ( Burke v. Seattle , Wash. Super. Ct., No. 17-2-21032-3, complaint filed 8/9/17 and Levine v. Seattle , Wash. Super. Ct., No. 17-2-21076-5, complaint filed 8/9/17 ).

The libertarian-leaning Freedom Foundation and an ad-hoc group formed to fight the tax called the Opportunity for All Coalition filed the lawsuits.

The question is whether the lawsuits will be able to kill the ordinance on statutory grounds without reaching the underlying constitutional issue, which is a major reason behind the passage of the tax. Members of Seattle’s politically progressive city council have hoped the tax would provoke a test case leading to the state Supreme Court overturning precedent that has long been a stumbling block to a state income tax.

State Supreme Court rulings stretching back to the 1930s have equated income with property that must be taxed at a uniform rate under the state constitution.

‘Really, Really Dangerous’

“This represents politicians entirely out of control pursuing whatever policy objectives they want regardless of what the laws and the Constitution require,” Freedom Foundation litigation counsel David Dewhirst told Bloomberg BNA Aug. 10. “We think that’s really, really dangerous.”

Both lawsuits, and the one filed earlier in the month by Seattle investment adviser Michael Kunath, make very similar statutory and constitutional arguments.

Dan Dunne of the Seattle office of Orrick, Herrington & Sutcliffe LLP—who represents plaintiffs in one of the Aug. 9 lawsuits—said the lawsuits argue:

  •  cities can only tax on authority that has been granted by the Legislature and the Legislature hasn’t granted authority;
  •  the Legislature enacted a statute that specifically prohibited cities from taxing net income, and a tax on gross income is a tax on net income; and
  •  the city charter doesn’t permit the city to tax income.

“The city seems to be positioning this tax as an excise tax on the privilege of doing business,” Dunne told Bloomberg BNA Aug. 10. “If that’s their argument, it fails because it is covered by the state Business and Occupation tax, which they’ve already imposed and this income tax doesn’t meet any of the tests that the city is required to live by under the B & O.”

The Freedom Foundation lawsuit also alleges the city income tax ordinance violates taxpayers privacy rights under Article 1, Section 7 of the state Constitution.

“We have a really robust constitutional right to privacy in Washington,” Dewhirst said. “Never before in Washington have residents had to turn over personal financial data of this caliber to state or city officials, and certainly not to city officials who through this tax exhibited overt hostility to them simply because they earn a particular income.”

Winning War

Both Dunne and Dewhirst believe they will prevail on the statutory arguments without reaching the constitutional ones. They cite the constitutional avoidance doctrine, which requires courts to decide cases on statutory or other non-constitutional grounds unless absolutely necessary.

But Seattle City Attorney Pete Holmes told Bloomberg BNA Aug. 10 that the city could lose on statutory grounds but still get a favorable ruling from the justices on the constitutional issue. Thus, they would lose the battle on the city income tax but win the war by clearing the path for a state income tax.

“We believe it’s important for the court to reach the constitutional argument. It was last considered well over 80 years ago,” Holmes said. “And the factual predicate today is different.”

Recent court decisions could also be construed as showing the justices are open to finding new sources of revenue, another difference, Holmes said.

“The initial conclusions are that we haven’t seen any legal argument that we haven’t anticipated and that will be subject to judicial scrutiny up to the Supreme Court,” Holmes said of the three lawsuits.

Holmes has retained as outside counsel Pacifica Law Group LLP of Seattle and Hugh Spitzer of the University of Washington School of Law.

Freedom Foundation is also working with outside counsel Scott Edwards of Lane Powell’s Seattle office.

Growing Movement?

Efforts to find revenue and address income inequality by taxing wealthy people or corporations have been cropping up across the country in places like San Francisco and Portland, Ore.

The San Francisco Board of Supervisors March 21 adopted a resolution to ask the California Legislature to change state law so that localities could impose local corporate and personal income taxes, also in response to President Donald Trump’s threats to pull funding.

Portland passed a first-of-its-kind tax in December on companies that pay their chief executive officer at least 100 times more than its median worker.

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State