In July 2017, the City of Seattle enacted a high earners income tax. The tax would apply only to residents of the city and not to people who work in the city but do not reside there. The amount of tax would be equal to 2.5 percent of annual income in excess of $250,000 for individuals who file singly or in excess of $500,000 for couples who file jointly.

Four suits challenging the tax were filed in King County Superior Court. These suits were consolidated into a single case, which was heard by Judge John Ruhl.

In briefs to the court, the plaintiffs presented three key arguments as to why the ordinance should be declared to be void:

• Cities only have authority to impose such taxes as they are specifically authorized by the Legislature to impose. There is no legislative authorization for the tax the city adopted.
• Cities are explicitly prohibited by statute from imposing a tax on net income. The tax the city adopted is a tax on net income.
• The income tax is a property tax that violates the constitutional requirement that taxes on property be uniform and the constitutional 1 percent rate limitation.

Ruhl issued his decision in the case in November 2017. He concluded that the first two arguments (the tax is not authorized, and it is a prohibited net income tax) are valid and on these bases declared the ordinance to be void. Having invalidated the ordinance on statutory grounds, Judge Ruhl found it unnecessary to consider the constitutional argument.

Our Policy Brief on the Superior Court case is available here.

The city almost immediately appealed Judge Ruhl’s decision, asking the state Supreme Court to take the case directly. The Supreme Court declined, and so the case proceeded to the Court of Appeals, where it was heard by three judge panel. The decision of this panel, written by Judge James Verellen, was published yesterday (July 15). The key points of this decision are:

• Under a 1933 state Supreme Court decision (Culliton v. Chase) income is property and a tax on income is tax inherently a property tax.
• State law explicitly authorizes first-class cities such as Seattle to levy property taxes.
• Beyond this, the legislature has provided to cities “a general grant of taxing power to raise revenue for local purposes.”
• The city’s tax is a tax on net income. However, the statute that prohibits cities from levying taxes on net income (RCW 36.65.030) is unconstitutional because the bill through with it was enacted violated the state Constitution’s requirement that “no bill shall embrace more than one subject” (Article II, Section 19).
• Because it is graduated (exempting the first $250,000 for single filers and the first $5000,000 for couples), the tax violates the state Constitution’s requirement that property taxes be uniform. It is therefore void.

The Seattle Times reports that the city intends to appeal this decision to the state Supreme Court.