State appeals court rules against Seattle income tax, but makes things more complicated

Today the state Court of Appeals released a decision in the appeal of the City of Seattle’s income tax. While it ultimately agreed with the King County Superior Court judge that the income tax is prohibited, it did so on a completely different basis — one that makes an appeal to the state Supreme Court inevitable but messier.

Pour yourself a stiff drink; you’re going to need it.

To win out over the legal challenges, the city needed to show three things:

  1. It has authority under state law to impose an income tax;
  2. its particular tax is not prohibited under state law;
  3. its particular tax is not prohibited under the state Constitution.

The plaintiffs argued against all three of these points: that the city needed explicit authority and didn’t have it; that it violated the statutory ban on imposing a tax on net income; and under the state Constitution the income tax is a property tax and violates the constitutional requirement that all property taxes be uniform.

The city, in turn, argued that it had general taxing authority; that it taxed “total income” not net income; that the state ban on taxing net income was unconstitutionally enacted because it was part of a larger bill that violated the “single subject” rule; and that income isn’t property (and therefore an income tax isn’t a tax on property).

The King County Superior Court had ruled that the city didn’t have specific authority for an income tax; it was “net income;” and the state ban was constitutionally enacted. It didn’t reach the constitutional question of whether income is property, following the principle of “constitutional avoidance” which says that if a court can decide an issue on statutory grounds, then it should do so and not reach for constitutional issues.

In today’s Court of Appeals ruling, the three-judge panel said:

  • Income is property, under a state Supreme Court precedent that the Court of Appeals has no authority to overturn.
  • That makes the income tax a property tax, and therefore the city has authority to enact an income tax because it is explicitly authorized by the state to impose property taxes.
  • The city’s particular flavor of an income tax, as enacted, is indeed a tax on “net income.”
  • That is moot, however, because the statutory ban on taxing net income was unconstitutionally enacted as it violated the “single subject” rule.
  • But since income is property, and the city’s income tax is not uniform, it is unconstitutional.

The point that the city has authority to impose the tax because it’s a property tax is new — the city had argued that it isn’t a property tax, and the plaintiffs didn’t want to concede that the city had statutory authority under any basis. But it’s a trap for the city: if it wins the statutory issues on that basis, it automatically loses the constitutional issue.

Also, it’s easy to miss, in the maze of this ruling, what may end up being its greatest impact: the appeals court just invalidated the state ban on taxing net income — it’s wiped off the books. If that stands, it means that jusrisdictions in Washington State can tax net income if they can show that they have general taxing authority granted by the state, and if the tax they impose is uniform or “flat.”

Even though the city lost the case at the appeals court level, it got what it wanted: a chance to argue in front of the Supreme Court the question of whether income is property, to try to convince it to overturn its own 89-year-old precedent. The conventional wisdom is that the currently-seated Supreme Court is itching to take on that question, but that doesn’t mean it’s going to be a slam-dunk for the city.

Article VII, Section 1 of the Washington State Constitution reads:

The power of taxation shall never be suspended, surrendered or contracted away. All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word “property” as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.

The arguments against income being property rely on precedents from other jurisdictions, both federal and state; there are plenty of them to cite. However, they can’t overcome the fact that this section of the state Constitution is crystal-clear on the definition of “property” that applies, because it supplies it itself. Property is everything subject to ownership. So is income subject to ownership?  The fact alone that wages can be garnished — which is codified in state law — makes it clear that it is. The Supreme Court would need to invent some truly tortured logic to draw any other conclusion about whether income is property for the purposes of this section of the state Constitution. And they might; but it’s far from a given that they will.

Dan Nolte, spokesperson for the City Attorney’s Office, has already indicated that the city will appeal:

“We’re pleased that the Court held the City had the statutory authority to enact an income tax. The City has always recognized that ultimately the Supreme Court is the proper place to overturn the bad precedent holding an income tax is a tax on property. We intend to petition our Washington State Supreme Court for appeal.”

It’s very likely that the plaintiffs will also appeal, to try to overturn the part of the ruling that invalidated the statutory ban on taxing net income. The cross-appeals will make this a very messy case where all the issues are still on the table, but it will also increase the likelihood that the state Supreme Court will take the case.

It’s also unclear how the state legislature will respond if today’s ruling stands — might they try to re-enact the ban on taxing net income next year if there are signs that local jurisdictions are contemplating imposing income taxes?  The current democratic majority wouldn’t be excited about doing so, but past voter initiatives to impose a state income tax have all failed so they may be under some pressure to do so.

The one thing for sure: there are more chapters of this story to be written in the months to come.

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