The Washington State Supreme Court this week declined to make a direct review of a lawsuit filed against the city of Seattle’s income tax ordinance. The decision comes right before the 2019 legislative session during which state lawmakers could consider a capital gains income tax proposal made by Governor Jay Inslee that, if passed, could trigger a similar lawsuit.
In a brief statement, the high court transferred the case to the Division 1 of the Court of Appeals. Created by the Seattle City Council in 2017, the ordinance was first examined in King County Superior Court later that year, where it was struck down on statutory grounds for violating a 1984 state law prohibiting a local income tax. The city and other local governments then petitioned the state Supreme Court to take up the matter directly, arguing that Seattle and other cities have the broad authority to impose a variety of taxes. They have also tried to portray it as an excise tax, as Inslee has described it as a capital gains income tax.
While touted as a more progressive revenue source to fund affordable housing programs, the city of Seattle’s ordinance is considered by some tax reform experts as part of an overall effort to overturn the state’s prohibition on a progressive income tax, after voters have already rejected proposed constitutional amendments six times. The idea of triggering a test case was first pitched to the city of Olympia, but the city council rejected the proposal. A proposal was then placed on the ballot via Olympia Measure 1, but was defeated 55-45 percent. The State Court of Appeals also retroactively declared the proposal illegal.
In the past, the state Supreme Court has also ruled repeatedly that income is considered property and thus subject to various portions of the state constitution such as the uniformity clause and the one percent property cap. In the 1960 case Apt. Operators Ass’n of Seattle, Inc. v. Schumacher, the court majority wrote that if the state wants a progressive income tax “the constitution may be amended by vote of the people.”
Washington Policy Center Government Reform Director Jason Mercier told Lens that “the Seattle income tax was not the vehicle that income tax proponents really needed to try to bypass the voters through the courts,” because there were “too many statutory prohibitions.” For the state high court to take up direct review and then ignore those statutes in favor of the ordinance would have been “extreme judicial activism.”
Seattle has vowed to continue its appeals, which Mercier says is “a matter of how much more taxpayer money they want to waste.”
Meanwhile, a separate lawsuit is bound to occur if Inslee’s capital gains income tax is approved by the legislature. However, unlike Seattle’s ordinance and Olympia Measure 1, the debate of whether a capital gains tax is legal is a constitutional one, rather than statutory. That means it is likely the state high court will review the case and decide whether income is property.
During a Jan 10. Associated Press Legislative Preview, Inslee defended his proposal, included in his 2019-21 operating budget, against claims that it would lead to an income tax. “This sort of camel’s nose under the tent fear I think we should work through because it is stymieing so many other common-sense things.
“Voters voted on what they wanted this year,” he added. “They happened to vote for the blue team.”
While some try to paint it as an excise tax, all states with capital gains taxes classify them as an income tax, as does the Internal Revenue Service (IRS). Argentina also taxes capital gains as part of income.