City files its first brief to state Supreme Court on income tax

Earlier this week the City of Seattle filed its first brief to the Washington State Supreme Court, attempting to entice it to take up the legal challenge to the city’s income tax ordinance.

Last year, a King County Superior Court judge ruled that the city’s income tax statute violated a state law prohibiting taxes on “net income.” The judge did not rule on several other points the city argued pertaining to constitutional issues, following the principle of “constitutional avoidance” wherein if a judge can resolve a case without raising constitutional issues, she or he should do so.

The City of Seattle chose to skip the appeals court and file its appeal directly with the state Supreme Court. That court hasn’t decided whether to accept the case yet, but will do so based upon written briefs filed by both sides.  The parties challenging the ordinance will file their reply brief in the weeks to come, and then the Supreme Court judges will decide whether to hear the case or punt it back down to the state Court of Appeals.

The city’s brief treads familiar territory, arguing that the ordinance taxes “total income” rather than the prohibited “net income,” despite the fact that as defined in the IRS form 1040, “total income” includes net business income and net investment income.  The brief makes quick work of this topic, and proceeds to the issue that it believes the Supreme Court is more interested in: the constitutional questions related as to whether an income tax is a property tax.

As I’ve written before, there is state Supreme Court precedent from the early 1930’s clearly stating that income is property and an income tax is thus a property tax — which must then be taxed uniformly under the State Constitutions, so an income tax couldn’t be graduated. The city makes three separate arguments for why an income tax is not a property tax:

  1. Income is not property. It argues that the state Supreme Court precedents were decided wrongly, and have since been invalidated by U.S. Supreme Court decisions.
  2. An income tax is rightly considered an excise tax, not a property tax, again citing case law from the U.S. Supreme Court and other state and federal jurisdictions. The logic behind this is that “income” is a one-time transaction, as money moves into someone’s possession, and thus a tax on it should rightly be considered an excise tax on that transaction. Also, income can only be taxed once, while property can be taxed over and over again.
  3. An income tax could be considered its own kind of tax, separate from excise, property, or other well-defined taxes.

The Supreme Court will likely follow the same path through this case as the trial court did: applying the principle of constitutional avoidance to first address the question of whether “total income” is “net income.” It may have no interest in that question at all, in which case it will let the Court of Appeals wrestle with it and wait to see the results.

As a side note, the city dropped entirely a separate argument that its co-defendant, the Economic Opportunity Institute, raised with the trial court: that the State Legislature made errors in passing the prohibition on “net income” that should invalidate that law.  It’s not surprising that it was dropped, as the argument received a legal thrashing in hearings and by the judge in his ruling.

After the plaintiffs file their reply brief, the Supreme Court will schedule the case for one of their monthly conferences to decide whether to accept the case and add it to their docket.

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