Washington State

Lawsuit Says Seattle's Income Tax Illegal, Unconstitutional


Tax the rich, not our future placard
Plashing Vole/Flickr

Seattle's "almost certainly illegal" income tax, passed last month, is already the subject of three separate lawsuits charging that it is, well, illegal.

The latest was filed yesterday by the Freedom Foundation—a conservative think tank in Washington state—and Seattle law firm Lane Powell PC, who say the new city-level 2.25 percent levy on high income earners clearly violates state law and the state constitution.

"The first issue with it," Freedom Foundation attorney David Dewhirst says, "is that it's plainly illegal. I think it's a major problem when politicians don't feel bound by the law they know exists."

The Seattle income tax violates a 1980 statute passed by the Washington Legislature which says, "a county, city, or city-county shall not levy a tax on net income," Dewhirst says.

The Seattle City Council has tried to skirt this prohibition by taxing total income rather than net income as described on various IRS forms. The Seattle income tax ordinance points to line 15 on IRS form 1040, which is a figure calculated after one has already deducted business, capital, and farming losses.

The problem with that, says Dewhirst, is the "total income" figure in the federal tax code is a net income measurement.

Truly taxing total, or "gross", income would mean taxing one's income prior to any deductions or exemptions. One's net income is what is left to be taxed following those deductions and exemptions, he says.

"It's a net number because its assessed after you've already taken some deductions out," Dewhirst says. "You've already reduced your gross amount at that point."

His lawsuit also charges Seattle's income tax violates the state constitution's uniformity clause, which requires all taxes in the same category of property to be uniform. Three separate state supreme court decisions from the 1930s onward have ruled income is property and must be taxed uniformly.

Seattle's progressive income tax violates that clause. The Seattle City Councilmembers who voted for the tax acknowledge as much, and are banking on the State Supreme Court ignoring past precedent and plain constitutional language for sake of justice.

"History shows that unjust laws need to be overturned," said council member Kshama Sawant, when asked about the constitutionality of the income tax ordinance.

Seattle City Attorney Pete Holmes struck a similar chord. "We think we have a good opportunity to present facts to the Supreme Court about the problems facing modern cities, which are much different from the problems facing cities in the 1930s. Taxing is a lightning rod issue, and it's something right-wing groups continue to mine for political advantage"

Holmes tells Reason, he thinks Seattle's ordinance has "a reasonable shot" of being upheld.

Dewhirst, for his part, is optimistic that Seattle's income tax will be struck down, saying that the Washington Constitution included a uniformity clause to prevent the kind of progressive and redistributive taxation the City of Seattle is currently pushing.

The framers of the Washington Constitution, he says "had a very acute interest in being left alone. They had strong libertarian impulses, so they felt like everybody has to share the tax burden to some extent."

Washington state currently has no income tax, and Washington residents have continually rejected attempts to impose one at the ballot box.

Fifty two percent of Olympia residents said no to a proposed city income tax in 2016. A state-wide income tax on the 2010 ballot was crushed, with 64 percent voting no. Nine ballot initiatives proposing some form of progressive income tax have gone before Washington voters since 1934, and all have been voted down.

Ultimately, says Dewhirst, Seattle's decision to go ahead with an income tax in the face of state law, the state constitution, and the state's historical anti-tax sentiment is extremely worrying.

"We find this lawless behavior on behalf of any elected politician is really troubling, and a bad indication for the rule of law."