Seattle income tax policy could impact Clark County

Controversial 2.25 percent tax on Seattle’s wealthiest residents may have repercussions for rest of the state

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VBJ File

A legal battle is brewing over Seattle’s launch of a 2.25 percent income tax on wealthy residents – and the results could impact us right here in Clark County.

The tax, passed by the Seattle City Council on July 10, is in conflict with the Washington state constitution, which equates income to property and forbids a progressive income tax. The only income tax the state constitution allows for is 1 percent across the board, but over the years voters have repeatedly knocked down referendums that would have created that sort of income tax. So, can Seattle get away with it? That will likely come down to a Nov. 17 hearing in King County Superior Court, said Jason Mercier, director of the Center for Government Reform, Washington Policy Center in Kennewick.

“If you look at our state constitution, you won’t find an income tax there,” Mercier said. “The only way Seattle can have an income tax is if it can be applied anywhere. For Seattle to be able to do this, the local prohibition goes away. That means I could go into Vancouver and try to do something like that. So, what happens when Seattle’s politics don’t stay in Seattle?”

A group of 36 Republican lawmakers sent a letter to Attorney General Bob Ferguson’s office on Sept. 26 asking him to defend the state constitution and fight the tax, but so far there’s been no response.

“I can tell you we’re reviewing that request, said Brionna Aho, a spokeswoman for Ferguson’s office. “I don’t have any further information beyond that.”

Vicki Kraft, R-Vancouver, and Paul Harris, R-Vancouver, both signed the letter asking Ferguson to defend the state constitution in the Nov. 17 Kunath v Seattle case.

“State law under RCW 36.65.030 reads: ‘Tax on net income prohibited. A county, city, or city-county shall not levy a tax on net income.’ The letter simply asks Attorney General Bob Ferguson to defend this state law as it relates to the recent Seattle income tax passed by the Seattle City Council,” Kraft said. “If he doesn’t or won’t defend it, why not? The state law is very clear on this matter.”

John Burbank, executive director of the Economic Opportunity Institute, said the tax is needed to support a host of underfunded services like affordable housing, education, parks and even police and fire services.

“We have in our state the most regressive tax system in the country and it’s having an impact,” Burbank said. “Legislative K-12 funding has been about $6 billion short per year. And state parks, you’ll notice the services are much less than they once were. That’s because the state has significantly reduced state funding for parks. There have been a lot of reductions like that.”

Looking at Washington property, sales, B&O (gross receipts) and gas taxes, the middle class pays about 10 percent of their income in taxes a year. Rich families pay only about 2.4 percent, which is causing a burden to the system, Burbank said.

“Because we are not taxing high-income families, we are leaving literally millions of dollars on the table that could go to public services like education,” Burbank said. “We have this unfair and inequitable tax system, and then we have the starving of public revenues on which we all depend.”

Creating a more equitable tax system would also help the state as the Trump Administration ponders more tax cuts on the wealthy, he added.

“This becomes even more important if the federal tax cuts go through and create a windfall for the wealthy in our state,” Burbank said.

Attempts at creating a citywide tax in Seattle, and a failed attempt in 2016 in Olympia, are also likely more than they appear to be. The overall goal seems to be to create a statewide tax, Mercier said.

“During the great depression they proposed an income tax – but it wasn’t uniform,” Mercier said. “And since that ruling the legislature has given voters six constitutional amendments on an income tax – and they were voted down each time.”

Seattle also gave EOI a $50,000 contract to draft its city income tax law, according to public records requests secured by CGR.

EOI developed a 2.25 percent tax on income in excess of $500,000 for joint filers or $250,000 for single filers in Seattle, which the city council adopted unanimously, Burbank said.

“If you earn $500,000, none of that is taxed, but everything on top of that is taxed at 2.25 percent,” Burbank explained.

The group also recently petitioned to represent itself as a separate entity in the Kunath v Seattle lawsuit.

“Seattle’s the one that passed this and it’s the one defending it,” Mercier said. “But EOI asked to be its own party in court. They want to fight for a statewide income tax.”
Burbank didn’t exactly deny the allegation.

“The goal is to give municipalities another funding tool,” Burbank said. “They need that since the state has pulled back from funding public services. If that results with the state proceeding with a state income tax, that’s really good and that’s what we’d like to see as well.”

Kraft, for her part, thinks that’s a bad idea.

“Any income tax places an additional burden on individuals and families,” Kraft said. “It would also have a negative impact on future economic development and would result in a patchwork of local income taxes in various areas, or worse a state income tax, which would have a significantly adverse effect on Washington citizens.”

Burbank said Washington voters actually did approve a progressive income tax in the early 1930s, but the Supreme Court reversed it.

“Back in 1932, people passed by initiative a progressive income tax with 70 percent public support,” Burbank said. “But in 1933 the Supreme Court said income is property, and that there could be no taxation exceeding 1 percent across all classes. So, they knocked off the income tax in a 5-4 decision.”

There is a potential gray area in the case as well. While the state Supreme Court in the 1930s disallowed a progressive income tax, and in 1984 the state legislature passed its own ban on local income tax, through vague language, a 1972 law that authorized combined city-county governments left a little wiggle room on income taxes, Mercier said.

“Even with that gray area, 60 to 70 percent of the voters just don’t want this,” Mercier said. “This is a legislative conversation. Do you want to allow this, yes or no? But when the legislature doesn’t want that, and has rejected it repeatedly, that’s another story.”