Seattle income tax details and legal questions

Last month, the Seattle City Council approved a resolution calling for a city income tax. A proposed ordinance has now been released, and there will be a hearing tomorrow.

Under the proposal, the tax would be 2 percent on income over $250,000 (for individuals) or $500,000 (for joint filers). Note that the tax would be on total income, not adjusted gross income. Presumably this is an attempt to get around the state ban on cities levying taxes on “net income.” (Consider, though, that when the ban was enacted in 1984, legislators just didn’t want to also prohibit B&O taxes, which are on gross receipts.)

The ordinance specifies that the proceeds of the tax (estimated to be $125 million a year) would be used to:

  1. Lower “the property tax burden and the impact of other regressive taxes”;
  2. Replace “federal funding potentially lost through President Trump’s budget cuts”;
  3. Provide “public services, including housing, education, and transit”;
  4. Create “green jobs and [meet] carbon reduction goals”; and
  5. Administer and implement the new tax.

This is a pretty broad list, and there’s no specification as to how much would go to which use.

There will be legal challenges to the ordinance if it is passed, including that it is unconstitutional in Washington to impose progressive income taxes. There are also statutory limits on a city’s taxing power, including the ban on income taxes noted above.

Still, the ordinance states,

The City of Seattle, as a Washington first-class city with extensive powers, including without limitation all the powers which are conferred upon other classes of cities and towns, possesses in the legislative body of the City Council “all powers of taxation for local purposes except those which are expressly preempted by the state” and also has the authority to impose excise taxes for any lawful purpose and on any lawful activity, as provided by RCW 35A.11.020, 35.22.280(32), 35A.82.020, and 35.22.570.

In a Puget Sound Business Journal op-ed earlier this month, attorneys Scott Edwards and Justin Hobson write that cities can impose license taxes, but “Case law requires that licenses be tied to a substantial privilege and cannot be required for the privilege to earn a living by working for wages.” The ordinance responds,

the City Council has determined that a tax on total income in excess of $250,000 per year for an individual (and $500,000 for joint filers) does not interfere with the right to earn wages within the City or with the ability of individuals and households to amply provide for a high quality of life.

If the ordinance is enacted, we’ll see if the courts agree. As Edwards and Hobson write, “Given the statutory landscape, the City Council will face quite the challenge in drafting an ordinance threading a hoped-for gap between statutory grants of taxing power and statutory limits on taxing power.” They also argue that the Seattle City Charter itself may not authorize the city to levy an income tax. As far as I can tell, the ordinance does not address this point.

Finally, the proposed ordinance specifically points to an Institute on Taxation and Economic Policy (ITEP) study as showing that Washington “has among the most regressive tax systems in the United States.” We wrote about why the ITEP study is flawed in a 2010 report on I-1098 (which would have imposed a statewide income tax on high-earners).

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