Supreme Court declines to hear income tax appeal

This morning the Washington State Supreme Court declined to hear an appeal of a lower court ruling on Seattle’s progressive income tax ordinance.

The Supreme Court had met en banc (meaning the full nine judges) earlier in the week to vote on whether to accept the case. In a tersely worded order, the Court said that a majority of the judges voted not to hear the appeal.

Last year a state Court of Appeals panel threw out the city’s income tax ordinance, but using a novel legal argument that neither side had proposed. It found that:

  • by precedent, income is a form of property for the purposes of apply the state Constitution’s requirement that all tax on property must be uniform;
  • the state law prohibiting taxes on net income was invalid because the bill enacting it violated the Constitution’s “single subject” rule for legislation;
  • since cities have been granted authority to impose taxes on property, they therefore have been granted authority to tax income — subject to the 1% cap and the requirement that it be uniform.
  • Since Seattle’s income tax ordinance was graduated, it was illegal.

It’s somewhat surprising that the Court declined to hear the appeal, as it was widely believed that the justices want to revisit the earlier precedents that found income to be a form of property for the purposes of applying the uniformity rule. The fact that the Court of Appeals ruling went so far afield makes it doubly surprising — the decision today leaves the appeals court ruling intact and binding.

There are couple of reasons why the judges might have decided to pass. First, only the defendants (the City of Seattle and the Economic Opportunity Institute) appealed to the Supreme Court; in fact, the plaintiffs asked the Court not to take the case. This is despite the fact that they only got a piece of what they wanted: while the “income is property” ruling still stands, the law prohibiting taxes on net income is history and the city now has confirmed its authority to impose certain kinds of income tax. Second, the “rule of constitutional avoidance” specifies that cases should be decided on statutory grounds if possible before reaching for constitutional issues; if the justices believed — as the plaintiffs argued — that there were plenty of statutory issues that would be decisive and they wouldn’t reach the constitutional issue they are apparently interested in, they might not have been interested in wasting their time with the case.

Mayor Jenny Durkan issued the following statement after this morning’s ruling:

“Washington State has one of the most regressive tax systems in the country, and our lowest earning residents consistently pay the highest share of their income in taxes. This is unfair, unjust and not sustainable. Those that have more can – and must – do more. This has never been more true than now.

“As we face the COVID-19 pandemic we are once again confronted with the reality that in times of crisis, those same residents that earn or have the least are the first to feel economic stings of job loss and instability. We must work today to avoid this in the next crisis. As we emerge from this emergency all of us need to rebuild a city that is more just and equitable. We will come back. We will restore the vitality of our city. But let’s build that city on a foundation that continues our amazing innovation, shares prosperity, and allows for economic opportunity.

“Seattle has the authority to adopt an income tax, and I believe we can craft a proposal that can help make our tax system less regressive. I will be undeterred in continuing to fight statewide for more progressive taxes.”

And City Attorney Pete Holmes issued his own statement:

City Attorney Pete Holmes: “That’s the end of the road for this piece of legislation, which, frankly, could not have come at a worse time. The denial of the petition means the Washington State Court of Appeals decision stands, which recognized the broad taxing authority of cities:  Seattle has the authority to adopt a flat income tax, but not a progressive one. My attorneys stand ready to advise policymakers in exploring all possible options available under that decision.”

That is two clear statements that city leaders want to pursue a new income tax, now that their authority is clear. It will be an interesting challenge to craft one that reduces the regressive tax system currently in place and still satisfies the uniformity rule in the Constitution.  The city does not have the power to grant exemptions — the state Constitution only grants that power to the state legislature, the Supreme Court has ruled. But it might have some flexibility as to how different “classes” of income are defined, i.e. capital gains, business income, and wages, since the Constitution only requires uniformity within a class of property.

With the city under financial pressure to respond to the COVID-19 outbreak — and to deal with a significant revenue shortfall — we will probably see a new income tax proposal sooner rather than later.

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