Making the case for Seattle’s income tax

After arguing for its income tax in King County Superior Court, Seattle awaits a decision this week as to whether or not the city’s strategy will work.

“The position the city is taking is that there is a state law that prohibits net income tax by a city,” said Jamie Lisagor with Pacifica Law Group. “The city is not imposing a net income tax, the city is imposing a tax on total income. That’s what the IRS calls it – total income.”

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Total income is the sum total of all income. Selling real estate or lemonade outside a normal salary would also qualify for the tax.

Lisagor and the Pacifica Law group are defending Seattle’s income tax in court. It places a 2.25 percent tax on individuals earning more than $250,000, or couples earning more than $500,000 in Seattle. Lisagor calls it a “modest tax.”

KIRO Radio’s Dave Ross points out that the city’s tactic of targeting total income — instead of net income prohibited by the state — places a lot of money on the table that many people wouldn’t consider, such as selling a home. If a person or a couple sold a home and received profit off of it, they could be taxed for that.

Lisagor addressed this scenario. It’s important to note that the IRS allows the first $500,000 of the sale of a primary residence to be excluded from taxes. For example, a couple purchases a home for $300,000 in Seattle, then later sells it for $1 million. The gain would be $700,000, Lisagor explains.

“What would be reported to the IRS is $200,000 because the first $500,000 is excluded … the way the math works out, the couple would not be subject to the city tax.”

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Unless they have additional income, of course.

“A substantial amount of additional income, because at this point we’re at $200,000 and they are not going to be subject to the tax unless they are making over half a million dollars,” she said. “So they would have a substantial amount of income from other sources.”

Of course, the tax will also hit high-earning salaries in Seattle.

“If you’re in your 20s and you are fortunate enough to have a job at one of our great tech companies and you make $250,001, then the city is asking for 2 cents,” Lisagor said. “The city, I think, reasonably decided that would be a fair way to raise revenues.”

Seattle income tax moving forward

Seattle’s goal from the start of its income tax proposal has been to have the tax challenged in court. This is because Washington state has laws banning income taxes. If the city can bring the tax to the state Supreme Court, it can have a shot at changing the interpretation of that ban.

“I think all of the parties to this case will expect that this case will go all the way up to the Washington Supreme Court,” Lisagor said. “The city will have to go through its normal process of deciding of whether to appeal from the superior court decision, and whether to seek direct review by the Washington Supreme Court.”

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On the other side of the case, the Freedom Foundation is among the plaintiffs arguing against Seattle’s income tax.

“To allow this income tax to stand would require the trial court to abandon 80 years of clear precedent and ignore clear taxing limits imposed by the Constitution and the Legislature,” said David Dewhirst, the Freedom Foundation’s chief litigation attorney. “If the city council can get away with so brazenly circumventing the rule of law in this instance, it will give a green light to even more extreme and detrimental policies in Seattle. That’s really bad news for Seattle residents.”

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