Is Seattle’s new income tax an unconstitutional attack on the wealthy?

Taxes, Money, Politics

In Washington state, municipal income taxes are barred by state law and arguably by the state constitution. That hasn’t stopped the Seattle City Council from unanimously approving such a tax on its wealthy residents.

Who precisely will pay, and what will the city do with the money? And will the tax hold up in court?

How the proposed income tax breaks down

Goal of the income tax

Under the new income tax, Seattle residents face a 2.25 percent tax on annual income above $250,000 for single filers and $500,000 for married couples filing jointly. The city is home to 11,000 residents who earn at least a quarter of a million dollars annually, according to 2015 U.S. Census Bureau numbers.

A group called “Trump Proof Seattle” initiated the income tax push. Its members – representing a variety of nonprofits and unions—were rewarded in July 2017, when the ordinance was passed by the city council.

Proponents claim that new tax is only fair because Washington, which has no state income tax, relies heavily on sales taxes, which impose a far greater burden on low-income households. Statistics reveal that state and local taxes gobble up nearly 17 percent of the income of Seattle households earning less than $21,000. Meanwhile, households bringing in more than $500,000 saw just 2.4 percent of their income going to state and local taxes.

Former mayor Ed Murray called the Seattle income tax a “new formula for fairness” whose goal is to challenge the state’s “antiquated and unsustainable tax structure.”

Will the income tax be lucrative?

Seattle will have to spend money to make money. Setting up the new tax system will require an estimated $10 million to $13 million, and maintenance and enforcement thereafter will cost $5-$6 million a year. The council predicts that the income tax would generate about $140 million annually.

Seattle’s city council members have proposed using the money from the income tax to lower other taxes, such as property taxes. They’re also hopeful that the monies can be used to improve transit and education, make housing more affordable, and create green jobs and reduce the city’s carbon footprint.

The Seattle Times, however, reported that some of the new revenue would be “set aside to backfill potential cuts in federal funding by the Trump administration.”

Can the new income tax hold up in court?

Polls indicate that two-thirds of Seattle residents support an income tax on the wealthy. But the tax has its fair share of opponents, who argue that it violates the state constitution, which prohibits taxing the same class of property at different tax rates. The Washington Supreme Court has twice (in 1933 and 1951) ruled in ways that would make Seattle’s income tax unconstitutional. Additionally, a state law expressly prohibits Washington cities and counties from taxing net income.

Conservative groups lost no time in challenging Seattle’s income tax in court. The conservative Freedom Foundation led the charge and won the opening round when, on November 22, King County Superior Court Judge John Ruhl ruled that the new tax violated state law that prohibits tax on net income. The city has said it will appeal, and observers expect the final showdown to play out in the Washington State Supreme Court, where the wording and design of the legislation may make or break its chance of holding up.

“Millionaires” and “Soak The Rich” taxes in other states

Proposals to tax high-income households are not unique to Seattle. New York City Mayor Bill De Blasio is pushing for a tax on the wealthy to address the city’s troubled transportation system. The so-called millionaires tax would be used to improve subways and buses and provide reduced fare options for commuters with lower incomes.

Some states, including Maine, Illinois, Kansas, and Oklahoma, have targeted their wealthiest residents with taxes but have not seen the huge anticipated increases in revenue afterward. Supporters say they’ll bide their time, expecting that return will be better in the long term.

Whether Seattle politicians will be able to take the same wait-and-see approach will lie in the hands of the court.

If you have questions about how this type of legislation may affect you, a local tax attorney can help you sort out those details.