Freedom Foundation

Appeals Court Rejects Seattle Income Tax, Setting Up Supreme Court Battle with Statewide Implications

Opponents of Seattle’s scheme to impose an income tax on its high earners were handed a less-than-satisfying victory on July 15 when an appellate court ruling struck down the ordinance solely on constitutional grounds, leaving open the possibility of an appeal to the Washington State Supreme Court, which could be poised to overturn longstanding constitutional prohibitions against income taxes not only in Seattle but statewide.

The ruling came in response to a lawsuit filed after the city attempted in July 2017 to impose a wealth tax of 2.25 percent on residents whose net annual income exceeds $250,000. Several different suits — including one whose plaintiffs were represented by the Freedom Foundation — were ultimately consolidated into one, and the tax was invalidated at the trial court level.

The city of Seattle and the Economic Opportunity Institute — an uber-liberal policy organization granted permission to join the suit — appealed the decision.

Monday’s unanimous ruling issued by a three-judge panel of the Washington State Court of Appeals, Division 1, affirmed that, under the Washington State Constitution, income is considered intangible property, so a tax on income is a tax on property. And since property taxes must be applied uniformly, the proposed Seattle tax is unconstitutional because it treats taxpayers differently based on their respective incomes.

But the ruling rejected two other arguments against the tax.

Freedom Foundation attorneys had argued no city possesses the inherent authority to impose any income tax on its residents, and the state has not granted Seattle the specific authority to do so. But the appellate judges ruled that municipalities are empowered by the state to impose property taxes, and because income is considered property, a city has authority to impose its own income tax.

The Freedom Foundation also argued that, under the plain language of RCW 36.65.030, it’s illegal to impose a “tax on net earnings.”  The court rejected Seattle’s preposterous explanation that the tax was not on “net” income because it was calculated using the Form 1040 line the IRS calls “gross” income.

But the judges ruled the applicable statute was invalid anyway because it violated the state’s single-subject rule, which is designed to prevent “log-rolling,” even though the entire bill is a single page long and overwhelmingly passed the House (94-1) and the Senate (43-5).

“In order for Seattle’s income tax to be legal, the court would have to reject all three of the arguments against it,” said Freedom Foundation Chief Litigation Counsel Eric Stahlfeld. “By rejecting only two, they upheld the trial court ruling. But I suspect the people supporting Seattle’s income tax will see this as encouraging them to appeal to the Washington State Supreme Court. They’ve believed all along the case would be decided at that level, where they obviously believe they have enough votes to prevail.”

Washington’s leftists have long sought to either replace or supplement the state’s existing sales and property tax structure with an income tax that could more easily be manipulated to reward their friends and punish those whose activities they consider unacceptable. But for generations they were thwarted by a Washington State Constitution that does not permit graduated income taxes, decades of court precedent affirming that interpretation and repeated rejections by the state’s voters of any attempt to adopt an income tax.

Tuesday’s ruling, while a temporary win for income tax opponents, could well set the stage for a final showdown that forces Washington’s courts and its lawmakers — under the watchful eye of its voters — to decide whether the Constitution means what it says or only what the radical left wants it to say.