Arguments open court hearing for controversial Seattle income tax

The battle over Seattle’s income tax went to court Thursday morning for opening arguments.

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It was nearly two years ago when Seattle City Council unanimously passed an income tax on high earners. But the 2.25 percent tax on total income above $250,000 for individuals, and $500,000 for married couples has yet to be imposed.

That’s because its been tied up in a legal battle that started almost immediately after it passed. Several Seattle residents sued over what most believe to abundantly clear: Income taxes are illegal in Washington state.

The discussion in court Thursday was seeped in legal jargon, statutes, and state codes. But it basically came down to a few distinct points: is Seattle’s tax an excise or income tax?; and do cities have the power to impose such taxes?

“It would be somewhat amazing if this statute were suddenly discovered after 52 years to give cities a power that no one ever knew they had before, ie to impose an income tax,” argued Rob McKenna, representing the plaintiffs suing the city over the income tax.

“The ordinance says quite plainly … the title of the ordinance is an income tax on high income residents,” he said. “Repeatedly throughout the ordinance it refers this as an income tax. Nowhere does it refer to it as being an excise tax. It is not an excise tax, therefore the city does not have the authority to impose it as an excise tax.”

Paul Lawrence argued for the city of Seattle, saying the courts have previously erred in three respects: it wrongly reasoned that the general granting of taxing power confirms no authority on any city to impose any tax; determining that the city’s income tax is not an excise tax; and determining it was a net income tax.

“It is, in fact, not (a net income tax)” Lawrence said.

Seattle income tax heads to court

Brian Hodges is a lawyer for some of the people who sued over the tax. He previously outlined a couple different legal arguments in the lawsuit. The first:

“The city violated the state Constitution, which prohibits placing taxes on any one group of people, requiring that if the state is going to adopt an income tax, it has to do so on all persons, and it has to impose the same tax rate,” said Hodges. The second argument relates to “a state statute that prohibits cities and counties from proposing a tax on net incomes.”

When a King County judge struck down the tax in 2017, he only ruled on the part of the lawsuit involving a tax on net income. The city then tried to skip over the appeals court and go straight to the state Supreme Court. The state court declined to hear the case in January, sending it back to the appeals court, which will hear arguments in the case Thursday morning.

The city of Seattle argues that this is an excise tax, rather than an income tax. That doesn’t hold up, says Hodges.

“That was rejected by the court, and has been rejected by numerous appellate courts in the past,” he said. “It’s an income tax — that’s what it says in the ordinance itself; it calls it ‘a tax on income.'”

The city also argues the tax is on total or gross income, rather than net. The lower court disagreed on both that and the excise tax argument.

When the state Supreme Court declined to hear the case, many saw it as a defeat for the city. But at the time, City Attorney Pete Holmes said he felt the State Supreme Court was the most appropriate forum to address the constitutional issues. Still, he noted that the City was happy to first take its arguments to the Court of Appeals.

Holmes declined an interview ahead of today’s arguments, but told me he expects the court to carefully consider the issues, and is hopeful it’ll rule in the city’s favor.

On the other side, Hodges said they’re feeling good heading into today’s appeals court arguments.

“You always have to be guarded when you’re arguing a case, but we’re very optimistic, especially considering we have 70 years of Supreme Court precedents invalidating attempts to impose income taxes on segments of the population,” he said.

Seattle council knew income tax was illegal long before passing tax

Thursday’s court hearing was for each side to argue their case. There are a couple of ways the case could eventually play out, including the possibility that the appeals court ruling ends this case altogether.

“If the court rules in favor of our clients, then the city has one option left: To submit a petition that is similar to the petition that was already denied to the Supreme Court. If it denies it, then the case is over [and] the income tax is unlawful,” Hodges said.

If the appeals court rules in favor of the city of Seattle, Hodges noted that his clients would “most certainly take this up to the Washington Supreme Court.”

If that happens, Hodges believes their case is strong.

“The city’s chosen the wrong vehicle to try and force a change to the state Constitution,” he said, pointing out that this issue should be left to the state Legislature if supporters of an income tax truly wish to change the law.

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