City appeals income tax ruling to state Supreme Court

As expected, yesterday the City of Seattle filed an appeal with the Washington State Supreme Court of the recent appeals court ruling on its income tax ordinance.

There is nothing surprising in the city’s appeal. It continues to argue the same points it did at the lower courts:

  • a tax on income is not a tax on “property” as defined by Article VII Section 1 of the State Constitution;
  •  an income tax is either an excise tax, or its own kind of tax (i.e. “sui generis”);
  • the state law prohibiting taxes on net income violates the “single subject” rule and is therefore invalid;
  • even if the state law is valid, the city’s ordinance taxes “total income” not “net income” and therefore isn’t prohibited;
  • the city has authorization from the state to impose a tax on income via RCW 35A.11.020 which grants “all powers” of taxation for local purposes, and potentially under RCW 35A.82.020 and 35.22.280, which authorize excise taxes.

With this move (assuming the Supreme Court accepts the case), the city is finally where it wanted to be all along: asking the Court to overturn its earlier precedents holding that income is property for the purposes of Article VII Section 1. The city is encouraged by its wins earlier in the week in the “First in Time” and “Fair Chance Housing” cases where the Court overturned significant numbers of its previous holdings; it clearly hopes the Court will do so again in this case.

As a reminder, here’s what Article VII Section 1 says:

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 Supreme Court precedents, starting with Culliton vs. Chase, have held that income is subject to ownership, and thus is “property” for the purposes of this paragraph (but not necessarily for the purposes of the rest of the Constitution and state law).  That means that any income tax in Washington state must be uniform or “flat” — it can’t be progressive (such as the Seattle income tax ordinance).

The city is not interested in imposing a flat income tax; it wrote and passed a progressive one that exempts an individual’s first $250,000 of income.

The argument for overturning Culliton that the city and others have put forward says:

  • The Culliton ruling relies on another case, Aberdeen vs Chase, which in turn relied heavily on Quaker City Cab Co. vs. Pennsylvania. But Quaker City was later overturned by the U.S. Supreme Court in Lehnhausen vs. Lake Shore Auto Parts, so the argument runs that the legal underpinnings for Culliton has disappeared.
  •  Washington State is an outlier in holding that income is property; the federal government and other states have ruled otherwise, most ruling that it’s an excise tax.
  • The city’s proposed income tax is an excise tax on the privilege of living in Seattle, measured by income. The city cites New York vs Graves and Stiner vs Yelle to support the notion that the city may impose an excise tax on the privilege of residency in the city.
  • Income is not subject to ownership.

The rebuttal to the city’s argument runs along these lines:

  • Whether other jurisdictions define income as “property” is not relevant to this case, since the applicable definition of “property” is provided by the Constitution in literally the next sentence after the requirement for uniform taxation. The only question is whether income is subject to ownership.
  • To that end: one can own an annuity, wages can be garnished, and an employer can owe back wages. Clearly there is a concept of ownership for income.
  •  Quaker City Cab Co. wasn’t a case about whether income is property; it barely mentions that. It’s really a case about equal protection, and whether a tax on corporate income can be restricted to only some corporations. And that’s the part of Quaker City Cab Co. that was overturned in Lehnhausen — not the discussion of income as property.
  • Culliton, and the general notion that income is subject to ownership, doesn’t rely heavily on Aberdeen. It largely derives it from first principles. Most of the critics of Culliton selectively quote small portions of the ruling to make it sound unreasonable, but the reasoning is lengthy and compelling. In a similar case three years later, Jensen vs. Henneford, the state Supreme Court reaffirmed its earlier view and gave a contemporaneous account that Culliton was exhaustively briefed, vigorously argued, and thoughtfully decided by the Court and thus should be respected as precedent.
  • Excise taxes are taxes imposed on a particular privilege granted by the state, and may not be imposed on a fundamental right. Companies have few fundamental rights, and the courts have ruled that governments have the right to impose excise taxes on the right of companies and individuals to conduct a business, hold a particular occupation (such as a plumber or electrician, which are licensed occupations), and have the business reside within a particular jurisdiction. In fact, that is precisely the context of the two cases that the city cites in support of the notion that the city has the right to impose an excise tax measured by income. But the courts have distinguished those cases from the fundamental rights of individuals to earn an income and to reside in a city. In Cary vs. Bellingham, the Court ruled that “The right to earn a living by working for wages is not a ‘substantive privilege granted or permitted by the state,'” and that a tax on wages earned as an employee is not an excise tax. Other courts have held that individuals (not corporations) have a fundamental right to exist in a certain place and that is not a privilege granted by the government — thus a B&O tax levied on a company based on income is an excise tax, but an income tax levied on individuals’ income is not.

Expect the plaintiffs in the case to file a cross-appeal on the issue of whether the state law prohibiting taxes on net income violated the “single subject” rule. The city didn’t raise that issue in its appeal, but did raise whether “total income” is “net income” — conditional on plaintiffs filing their cross-appeal and the Court finding the law to be valid.

As to the timing: the plaintiffs will file their response to the city’s appeal, and most likely their cross-appeal, in the coming weeks, the city will file a response, and then the Court will decide whether it wants to take the case. If it does, it will then take several more months for both sides to write their briefs, for oral arguments to occur, and then for the Court to finally rule. Expect oral argument in the late spring or early summer, and a ruling perhaps by the end of 2020.


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