What people outside Seattle should know about income tax lawsuits

Aug 10, 2017, 7:58 AM | Updated: 4:37 pm

income tax...

(Alan Cleaver, Flickr)

If the challenges against Seattle’s income tax fail, people living outside of the city need to understand that it could open the flood gates for state lawmakers and other jurisdictions.

RELATED: Attorney expresses concerns over Seattle income tax lawsuits

Former state Attorney General Rob McKenna, who is behind one of three lawsuits, told Seattle’s Morning News that it could lead to a statewide income tax and/or other city income taxes.

“People who don’t live in Seattle need to understand this is a test case…” he said.

Additionally, McKenna warns that the law in Seattle could change and extend to “far more people” if the city decided to do so.

Two new lawsuits opposing the income tax were filed this week. McKenna and former state Supreme Court justices are involved in one of those. The other is being led by the Freedom Foundation.

The first lawsuit was filed last month.

All three lawsuits say the city’s plan to levy a 2.25 percent tax on individual incomes of more than $250,000, or combined incomes of more than $500,000, at the beginning of next year is against state law. The tax would apply to the money earned above the set limits.

The Seattle City Council unanimously approved the income tax in July. Seattle Mayor Ed Murray quietly signed the tax into law days later.

Supporters of a city-wide income tax argue that the state’s tax system is unfair.

“Clearly we need a statewide income tax, but our Legislature isn’t going to do that,” Councilmember Sally Bagshaw said. “… other cities are going to follow this lead. I have heard a number of people say that people will just move out of the City of Seattle; the wealthy are going to move. You know that’s not true … and if we get past the constitutional muster, other cities are going to jump on this.”

Seattle’s income tax in court

The Legislature, however, is where the income tax battle should properly be waged, according to some critics.

“If you are going to do this, do it at the state level only, and do it with appropriate and significant reductions in these other (sales and property) taxes,” Attorney Phil Talmadge told KIRO Radio’s Dori Monson.

Talmadge is a former state Supreme Court justice and Democratic state senator. He currently represents parties suing Seattle over its income tax.

“The bottom line is that we have a number of arrows in our quiver that are pretty strong and potent arguments to defeat this proposal,” Talmadge said. “And mind you, I’m somebody who historically voted for an income tax when I was in the Legislature.”

But Talmadge says Seattle’s tactics are the wrong way to get an income tax, and it also is poorly designed.

“That’s one of the things that’s offensive about this proposal; it isn’t just a tax on the rich,” he said. “That’s something that is really a misnomer sold by proponents on the measure. For example, if you are a business owner and you are a partnership or an S corporation where the money passes through, you are taxed an all the gross income of the business, not what goes into your pocket. That will kick a lot of people above the dollar limit the ordinance sets. Also, if you sell a house tomorrow with this super-heated housing market we have, more than $250,000 on that sale, guess what, that’s income. You are going to pay taxes on that sale.”

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What people outside Seattle should know about income tax lawsuits