Judge strikes down income tax ordinance

This afternoon King County Superior Court Judge John Ruhl struck down Seattle’s income tax ordinance, setting the stage for the inevitable appeals up to the state Supreme Court.

Here is my summary from last Friday of the legal issues that Ruhl needed to decide, and here’s the full text of today’s order.

As expected, Ruhl started with the statutory challenge: that the ordinance violated RCW 36.65.030, which prohibits a tax on net income. And he tore through the city’s defenses. He rejected the claim that the tax is really an excise tax on the privilege of living in Seattle, bolstered by the fact that the ordinance itself says that it’s an income tax. He also affirmed that it is indeed a tax on net income, despite the city’s protestations that it was on “total income.”

Although it is true that “net proceeds” is not synonymous with “net income,” a “total income” figure that includes “net proceeds” necessarily reflects the result of a netting process, and thus is “net income.”

And he found that the law prohibiting a tax on net income was not improperly passed by the Legislature and is thus valid. He bought the argument by the plaintiffs that while the Legislature was trying to pass a new set of laws on city-county governments, it understood that the state Constitution requires cities, counties and city-counties have the same rights and restrictions and thus in order for it to prohibit a city-county from enacting an income tax, it needed to pass the same requirement for cities and counties.

Finally, Ruhl concluded that the city needed explicit authority to impose a tax, and that none existed.

Having concluded that state law prohibits a tax on net income, that the city’s income tax ordinance is indeed a tax on net income, and that no other authority existed for the city to impose such a tax, he granted the plaintiffs’ motion for summary judgment and struck down the income tax ordinance.

Having found that it violated state law, Ruhl (as expected) chose not to look at the larger constitutional question of whether income is a form of property. That would have been a short discussion at any rate, given that there is binding state Supreme court precedent finding that it is; the Supreme Court could overrule its own prior decision, but a lower court cannot and is bound to follow it.

The case will now be appealed by the city and its amicus partner, the Economic Opportunity Institute. It will be heard in the state Court of Appeals by a three-judge panel. That is, unless the state Supreme Court grants an appeal directly to it — which might happen, since it’s a high-profile case that is destined for its docket either way. On the other hand, the legal issues that would be of most interest to the Supreme Court are the constitutional ones, which for the moment are off the table. The Court of Appeals is required to hear the appeal; the Supreme Court chooses which cases it hears, and it’s hard to imagine its justices eager to delve into the issue of whether “total income” is “net income.”

Mayor Tim Burgess and City Attorney Pete Holmes issued a statement this afternoon on the ruling:

“Our state continues to be one of the worst in the nation when it comes to tax fairness, a result of our misguided over-reliance on regressive sales taxes. We are also living in a time of extreme income inequality that corrodes our social compact and causes many to wonder whether wealthy individuals are paying their fair share. When it comes to Washington state, the studies are clear: the wealthiest among us are not paying their fair share. As it happens, many of them agree. In order to build a more just and equitable society for all, we need a serious overhaul of our state’s tax structure. We know some argue against any income taxes at all, but we would point out that we already have a corporate income tax in this state—through the business and occupation tax. But we need more progressive tax sources, not fewer. The Seattle income tax was an attempt to move toward this goal, and we are hopeful that it will be upheld on appeal.”