In November 2017, a King County Superior Court judge ruled that the city’s income tax ordinance violated the state law prohibiting a tax on net income. The city and co-defendant the Economic Opportunity Institute appealed directly to the Supreme Court, which in turn refused to hear the appeal and sent it back down to the Court of Appeals. After months of back-and-forth briefs (case 79447-7), today was the big day for the hearing in front of a three-judge panel.
At a high level, the case pits two well-entrenched judicial principles against each other:
- “stare decisis,” which holds that past precedent must be respected in how substantially similar cases have been decided in the past in the same court or one up the appeals chain from it. In this case, the state Supreme Court has ruled repeatedly that income is property, and since under the state Constitution property must be taxed uniformly, a graduated income tax such as Seattle’s is unconstitutional.
- “constitutional avoidance,” which holds that if faced with both statutory and constitutional issues in deciding a case, courts must decide the case on statutory grounds if at all possible without reaching the constitutional issues. In this case, that means that the court should deal with the statutory issues before looking at the issue of whether Seattle’s income tax is an unconstitutional property tax.
This morning, Judge James Verellen showed little patience with the principle of constitutional avoidance, asking both parties, “Why isn’t a very short opinion to follow?” that simply strikes down the law as unconstitutional because of stare decisis. Paul Lawrence, the attorney representing the city, did his best to encourage the judges to look at the merits of the constitutional issue anyway, noting a handful of cases where lower courts chose to provide guidance to the Supreme Court — even though the Supreme Court is the only one allowed to overturn its past precedents. Former Attorney General Rob McKenna, representing the plaintiffs, took the opposite stance, asserting that if the judges applied stare decisis, “it’s done.”
That left 38 of the 40 minutes of allocated hearing time to talk through the rest of the legal arguments, mainly the statutory ones. The city had the tougher argument to make, since there are strong arguments that it violates state law prohibiting taxes on net income as well as the constitutional prohibition on non-uniform property taxes mentioned above. Lawrence and co-counsel Claire Tonry (representing EOI) repeated the arguments that failed at the trial court level:
- state law grants the city explicit taxing authority for an income tax. The law granting broad taxing authority lists four explicit exceptions, and the prohibition on taxing net income is not one of them.
- “total income” is gross income, not net income. Their logic behind this claim continues to be difficult to follow.
- an income tax is not a property tax: it’s either an excise tax, or its own class of tax;
- the bill that established the prohibition on a tax on net income was unconstitutional, in that it violated the requirement for “rational unity” by containing multiple unrelated components. It was included in a bill that created a new classification of hybrid “city-county” municipalities, with multiple components granting various powers to city-county governments. The provision that prohibited taxes on net income was the only part that applied to cities and counties as well. That raises the question as to whether “rational unity” existed between it and the rest of the bill.
McKenna, on the other hand, repeated his winning arguments from the trial-court level:
- state law does not grant the city explicit authority for an income tax, as required;
- it’s not an excise tax; nowhere in the ordinance does it even suggest that it’s an excise tax, and the city didn’t even introduce that line of argument until late in the briefings at the trial court level. Case law also clearly says that unlike business excise taxes, which are taxes on the privilege of doing business in a jurisdiction, a pesonal income tax can’t be imposed on the privilege of living in a jurisdiction or on a person’s right to earn wages, so it doesn’t meet the requirements of an excise tax.
- “total income” is net income because it is the sum of several net-income sources. Judge Verellen seemed bought into that argument.
- the state constitution defines property (for the purposes of taxation) as anything tangible or intangible “subject to ownership,” and therefore income is property. It doesn’t matter how income is classified anywhere else, because that definition, straight out of the state Constitution, is the one that controls for these purposes.
- the legislature knew what it was doing when it passed the prohibition on net income taxes, and there was no sign of either legislative logrolling or confusion on the part of the legislators when they debated and passed it. And there is “rational unity” because all the sections relate to granting powers to city-counties.
- the reason the law specifically states “net income” is to distinguish it from “gross income,” because B&O taxes are a tax on gross income. “Total income” has no defined legal meaning in state law, in the tax code, or in the multi-state tax compact (which Washington belongs to).
- Income taxes aren’t prohibited broadly; if a city has taxing authority from the state to impose one, then it can impose a uniform tax on gross income.
While some of the statutory questions are debatable, the judges left little doubt that if they were to find for the city on all of the statutory issues and reach the constitutional one, they would need to apply stare decisis and rule against the city on that basis. Probably the strongest argument the city has is that the law prohibiting a net-income tax violates the single-subject rule (and even that is far from a slam-dunk; the trial court judge didn’t buy it). But even if the judges rule in the city’s favor on that issue, they are still likely to lose on the issue of whether the city has explicit authority from the state to impose an income tax on individuals’ income. So the chances of the appeals court reaching the constitutional issues remains low.
That will be a big disappointment to the city, and even more to their partner, the Economic Opportunity Institute, which has lobbied for years to try to get a case in front of the Supreme Court that will allow it to overturn its “income is property” precedent. It’s looking more and more like this case will not be the one.
It’s unclear how quickly the Appeals Court will rule on this case. If it ignores the priciple of constitutional avoidance, it could turn it around quickly and, as Judge Verellen suggested, write a short opinion citing stare decisis and the binding Supreme Court precedent. On the other hand, if it decides to plow through all the statutory issues, it could be months. There are no timetables for Appeals Court decisions. And no matter how it rules, the losing side will appeal it back to the state Supreme Court, so don’t expect a final resolution until 2020.