State Supreme Court declines to hear income tax case, sends it to Court of Appeals

Today the Washington State Supreme Court denied a request by the City of Seattle to hear its appeal of a legal challenge to the city’s income tax ordinance, instead redirecting it to the Court of Appeals for further proceedings.

As is typical, the order did not provide a rationale for rejecting the direct appeal, which would have skipped the Court of Appeals and let the Supreme Court review the King County Superior Court ruling directly.

The City lost the case at the trial court level: the judge ruled that Seattle’s ordinance violated the state law banning taxes on “net income.” The city had tried to circumvent that law by taxing “total income” as defined on the federal form 1040, but the plaintiffs challenging the ordinance successfully argued that “total income” included some forms of net income such as business income and investment income.

The income tax ordinance faces a second legal hurdle: a 1931 state Supreme Court precedent that declares income to be property and thus subject to the state Constitution’s requirement that all property be taxed uniformly. The city’s ordinance exempts the first $250,000 of income.

Speculation abounded that the Supreme Court is interested in revisiting, and potentially reversing, that 1931 precedent. But a principle of jurisprudence stands in the way: if a case raises both statutory and constitutional issues, courts are expected to decide the statutory issues first, and only reach the constitutional issues if necessary. In this case, the trial court decided the case on statutory grounds, finding that total income is indeed net income and thus the ordinance is prohibited under state law. It never ruled on the constitutional issue.

Given that, in order for the Supreme Court to reach the constitutional issue, it would need to reverse the trial court on the statutory issue, and then decide it wants to jump ahead and resolve the entire case by addressing a constitutional issue that the lower court didn’t take up (and therefore, one could argue, is not properly before the court).

Reading the tea leaves, what the Supreme Court’s decision today means is that the justices are likely thinking one of the following things:

  1. The trial court seems to have ruled correctly on the statutory issue; or
  2. The trial court may have ruled incorrectly on the statutory issue, but we’re not interested in that issue so let the Appeals Court deal with it and maybe it will get bounced back up to us again later.

If the Appeals Court does reverse the trial court on the statutory issue, then the case likely goes back down to the trial court, this time to rule on the constitutional issue (and start the entire appeals process over again). But both the trial court and the Appeals Court would rule very quickly, because they have no choice but to find it unconstitutional.

Under the legal principle of stare decisis, court are bound to follow prior precedents. The principle is actually applied in two separate ways: “vertical” stare decisis means that lower court must abide by the precedents set in courts up the chain from them, and “horizontal” stare decisis means that a court may only depart from its own prior precedent if the earlier ruling was clearly in error or if the body of legal opinion has evolved since then so as to render the original ruling inappropriate. In this case, the 1931 case was at the Supreme Court level, so by vertical stare decisis the trial and appeals court have no choice: they must follow it. Only two courts can reverse a state Supreme Court precedent: itself, and the one higher court in the land — the U.S. Supreme Court. That’s why the city rushed to get the case in front of the State Supreme Court: it knows that the only favorable outcome it can hope for requires that court to reverse its own precedent. Until that happens, all this is just the warm-up act.

The big take-away: this case isn’t going to be resolved anytime soon.  The fastest path to a definitive answer is for the Appeals Court to affirm the trial court’s ruling this summer (which it might, since all the briefs were already written and submitted to the Supreme Court and will likely just get re-filed with the Appeals Court), and then for the Supreme Court to quickly reject the inevitable appeal. That would still take most or all of 2019. Any other path will stretch it out into 2020 or beyond.

 

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