For more than 80 years the Washington state Supreme court has ruled that income is property as defined by the Washington state constitution, which effectively prohibits a progressive income tax. The high court is now expected to take up the question again as part of a lawsuit involving a city of Seattle graduated income tax ordinance passed in 2017.
Until recently, the city has made a variety of legal arguments as to why its ordinance is legal. Now, it is claiming that income is not property; they argue the 1933 court decision that first ruled on the matter was erroneously based on a separate decision that was later invalidated. However, voter material written at the time the definition of property was added to the state constitution in 1930 indicates otherwise.
Seattle attorney Bill Severson has researched the history of the 14th Amendment that added the property definition to the state constitution. He told Lens it’s not hard to see what advocates had in mind. “It’s really clear in the constitution that they wanted (there) to be income.”
For the first 30 years following statehood in 1889, Washington state relied primarily on a property tax for revenue. However, an existing provision in the state constitution required that property be taxed uniformly based on classification. The state legislature had passed a law exempting a list of “intangible” property from taxation. That law was challenged, but upheld by the State Supreme Court in 1908 via Wolfe v. Parmenter.
Severson said the ruling touched on a pertinent issue at the time; separating “tangible” assets such as wealth from the “intangible” ownership interests in the wealth.
“The decision held that as long as all wealth is taxed uniformly, the constitutional uniformity requirement is satisfied,” he wrote in an email. “The question was never addressed whether an income tax could have been adopted under the original constitutional provision.”
Severson said that at the time, states were looking for various ways to shift away from reliance on a general property tax for revenue. “A lot of states adopted an income tax. It was viewed as an either/or choice. The other (choice) was to adopt this classified property tax, but allow intangibles to be classified as a separate class so we can tax them. It is patently clear that the proponents of the Washington constitutional amendment entirely intended to choose the classified property tax route.”
Income tax proponents first tried to amend the constitution in 1928 by adding language “intended to bar the legislature from doing what it did in the statute that was reviewed in Parmenter,” Severson said.
In the voter’s pamphlet, the pro-argument states that the amendment will allow the state to tax incomes from stocks and bonds as a separate property classification than land. “All property cannot be taxed alike. Land is immoveable and is taxed where…the owner of bonds can move out of the state and take his bonds with him, and would do so if the bonds were assessed and taxed at the same rate as land.”
Severson says this is because if the income from bonds was taxed at the same rate as property, it was “never going to work. Everybody sort of recognized that.”
After the amendment was rejected by almost 52 percent, income tax proponents came back again in 1930 with the 14th Amendment. This time, the amendment language included the following sentence: “The word “property” as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.”
“The very purpose of this language is to make clear that ownership of the right to income is property,” Severson said. “And there is no sensible way to try to argue that ownership of the right to income is somehow different than ownership of income. They are the same thing.”
The pro-argument in the voter’s pamphlet again makes it clear that the intent of the amendment was to allow a tax on income as a separate class of property. It states: “The excessive taxes applied to lands, homes, and real estate generally in this state, demonstrate the necessity for a change in our tax system. ‘Uniform and equal’ sounds fair, but in reality its application to a tax system works most unfairly, as all forms of wealth do not have the same ability to pay. Stocks and bonds cannot pay the same tax as real estate, and escape altogether under our present system. Under the proposed amendment it will be possible to tax bonds and stocks other than those secured by or representing property taxed in this State, at moderate rates, leaving them still desirable as investments.”
This time, voters approved the amendment by 60 percent. However, the state legislature proceeded to exempt “intangible” property from taxation (page 279); this law was challenged but upheld by the State Supreme Court in its Atwood v. Wooster decision.
In 1932, Washington voters approved by 70 percent a progressive income tax to pay for education; the tax was invalidated by the 1933 state Supreme Court decision Culliton v. Chase. In its decision, the high court wrote that “it would certainly defy the ingenuity of the most profound lexicographer to formulate a more comprehensive definition of “property” than that found in the Washington state constitution.
“Income is either property under our fourteenth amendment, or no one owns it,” the opinion states. “If that is true, anyone can use our incomes who has the power to seize or obtain them by foul means.”
Since then, the high court has consistently ruled that income is property. In a concise 1960 decision, the court advised that “the constitution may be amended by vote of the people.”
However, Washington voters have rejected six constitutional amendments allowing a progressive income tax, as well as four income tax initiatives.