When Council President Bruce Harrell called the vote for Seattle’s very own income tax on July 10, the outcome was a foregone conclusion: 9-0. The gallery went wild. The opposition, poised outside City Hall, began spinning.
The bill is straightforward: the final iteration requires a 2.25 percent tax on income over $250,000 for a single person and $500,000 for a couple filing jointly living in the city of Seattle. The $125 million expected to come out of the tax would be used for education, homelessness, affordable housing, transit, even a break on property taxes and, more controversially, a reduction of taxes on small businesses.
It’s the opening salvo of a larger struggle to reverse a decades-old court decision that held, rightly or wrongly, that such a measure runs counter to the Washington state constitution.
The public-facing process happened fast. A resolution sponsored by Harrell and Councilmember Lisa Herbold committing to an income tax moved on May 1, with mayoral approval granted four days later. The Trump-Proof Seattle coalition, which drafted and pushed the proposal in concert with Councilmember Kshama Sawant, mounted a public relations onslaught with a forum in every council district and heavy showing at each public meeting or hearing on the matter.
Members of Trump-Proof Seattle lined the back wall of the council chambers time and time again, unfurling large banners tiled with yellow petitions from Seattle residents asking for relief from soaring property taxes and regressive hikes in sales taxes, forcing the lowest income residents to shoulder the costs of public goods while the wealthiest took a free ride.
The blatant disproportionality inspired even high-income folks to speak against the current system that drains the bottom quintile of seven times as much of their income as the top 1 percent, according to the Institute on Taxation and Economic Policy, a left-leaning thinktank.
At a separate hearing a month prior, a French tech worker stole hearts with his professed discomfort living in a place that that claims to be progressive on the national stage while shirking its responsibility to most of its residents. He’d pay a 45 percent tax in his home country.
“People said, you don’t pay taxes in your state? Congrats,” he recalled. “What do you mean congrats? It was terrifying.”
“Please, tax me,” the young man concluded to thunderous applause.
“Please, tax me,” the young man concluded to thunderous applause.
Only three speakers out of nearly 60 spoke against that day. Of those, two said outright that they did not qualify for the tax as proposed, opposing it instead on ideological grounds.
Perhaps the silent opponents knew they were outnumbered in these public forums, which became echo chambers of support. Perhaps they felt secure that no matter what the council did, their earnings were safe.
Sawant had a different explanation.
“If you read the op-ed from big business representatives and strategists, they’ve made it clear they intend to fight this in the courts rather than City Hall,” she said July 10 from the dais.
Within moments of the vote, Washington GOP Chair Susan Hutchison called on wealthy residents to resist the tax, calling nonpayment an act of “civil disobedience.” The Freedom Foundation, a libertarian group that opposes the policy, vowed to file a lawsuit to put a halt what it viewed as an unconstitutional injustice.
“Issues that need to be addressed in the tax system, let’s address them as a society.”
“It’s an issue, ironically an issue of fairness. The reality is we don’t like laws which single some people out for different treatment,” said Jami Lund, a senior policy analyst with the Freedom Foundation. “Issues that need to be addressed in the tax system, let’s address them as a society.”
The anti-tax coalition is making a gamble that courts today will find as they have in the past that income is a form of property and, under the Washington state constitution, neither a city nor the state may tax the income of one person or group more than any other. A win means the maintenance of the status quo. A loss upends the board.
To defend their position, the plaintiffs will have to swallow hard and knowingly open the gates to the judicial equivalent of a cartoonish Trojan horse with a blinking carnival sign over a trapdoor reading “Open me!”
“We do not have to accept unjust laws, because we can overturn them,” Sawant said.
Seventh Haven
Washington is one of seven states with no income tax, and the only one in that category that consistently votes blue. It sits uncomfortably in the company of Alaska, Florida, Nevada, South Dakota, Texas and Wyoming, like the black sheep of the family that hangs out in the back at reunions and makes snarky comments to no one in particular.
Voters tried, successfully, to tax themselves in the 1930s, pressured by the financial collapse and a sense that had been growing for some time that the revenue system built into their agrarian economy no longer served its function as new industries flourished.
A uniform tax on similar forms of property — a standard embraced by many states to combat sweetheart deals with transportation firms in the 1800s — made sense when residents derived their economic well-being from what they could produce from the land. Land ownership was a meaningful proxy for wealth, just as tax collection in 17th century England, Wales, Scotland and Ireland was based on the number of windows in a home.
The strategy began to look mightily unfair when farms gave poor yields but still paid in property taxes, whereas financial firms that gave farmers loans had little real estate, but a lot of money, wrote Hugh Spitzer, now a professor at the University of Washington.
Taxing income in addition to land suddenly seemed like a good idea.
A coalition of agricultural, labor and education interests — even then property taxes were starving schools — fought for and won Initiative 69 in 1932, creating a graduated income tax. It lasted roughly a year before the Washington Supreme Court struck it down.
Justice Oscar Holcomb, in his majority opinion, concluded that income was, in fact, a form of property, and to tax it at a graduated or progressive rate violated the Washington state constitution’s uniformity clause, which requires that all types of property must be taxed at the same level.
That’s where people like John Burbank think the courts got it wrong.
“They reached with this ludicrous opinion that income is property, and any tax on income has to be a property tax,” Burbank said.
“They reached with this ludicrous opinion that income is property, and any tax on income has to be a property tax,” Burbank said. “Income is a flow of money that is incoming. Property is something that is discrete and you hold year after year after year.”
Burbank is the executive director of the Economic Opportunity Institute, a public policy thinktank that focuses on social issues. He and his team helped draft the policy end of the income tax proposal, and he’s been the main cheerleader for the measure in the press, laying out the arguments and sparring with anti-tax libertarians like Jason Mercier, the director of the Center for Government Reform.
Burbank and his partners in tax see the measure as a way of forcing the issue before the Supreme Court to change existing jurisprudence and make income taxes legal in the state. It’s a common technique: landmark cases in this country were decided because interested parties set up the dominoes with the intention of knocking them
down.
The case could be a gamechanger.
The curious case of St. Louis
When the City Council made it clear that they would pursue an income tax, staff had to figure out how to pull it off.
Roughly 5,000 cities levy some kind of income tax, according to the Tax Foundation. The trick: The majority of those cities are in Ohio and Pennsylvania, two states that already collect an income tax. They have the basic infrastructure needed to pull off such a levy, the most important piece of which is information about how much people actually make.
If Seattleites had to pony up tomorrow, who pays what would be on a sort of honor system.
Seattle, at this moment, does not have fine-grained data about income like that available to most states and the Internal Revenue Service (IRS). If Seattleites had to pony up tomorrow, who pays what would be on a sort of honor system.
To structure an arrangement with the federal government to get that information, Seattle looked to St. Louis, Missouri.
Any city with a population above 250,000 can make a deal with the federal government to get the information that the IRS uses to assess taxes. It takes time to forge such an agreement, and money to create and maintain the systems necessary to run the process. Seattle estimates that the upgrades and staff will cost $10 to $13 million upfront, with ongoing costs between $5 and $6 million per year.
St. Louis has such an agreement with the federal government, which Seattle employees researched as an example of how one might be structured. But the story of St. Louis’ earnings tax holds other lessons for Seattle, and the legal basis that the city could use to implement such a tax
St. Louis first launched an earnings tax on people who worked in the city, regardless of domicile, in 1959. Elected officials did it because property taxes weren’t bringing in enough revenue to offer even basic services like rat abatement — the rise of automobiles facilitated White flight to the suburbs, leaving the elderly and the poor in the city center.
The population of the city dropped from a peak of 821,960 people in 1930 to 586,400 in 1972.
The declining population didn’t translate into a decrease in services required to keep the St. Louis going — the suburbanites continued to demand nice things like paved roads, garbage collection and public safety when they commuted into work each day.
So, St. Louis decided that commuters would pay for the services.
What followed was a decades-long saga in and out of the courts in which city officials attempted to implement an earnings tax on people who worked within the limits of St. Louis.
The policy brought neighboring cities to near apoplectic rage.
The policy brought neighboring cities to near apoplectic rage: the mayor of Maplewood, Missouri threatened to charge every car from St. Louis 25 cents to use the streets in Maplewood, and the mayor of East St. Louis, which is in Illinois, ominously contemplated some kind of retaliatory legislation. One state legislator tried to outlaw municipal income taxes altogether. More than 100 firms refused to pay the first time bills came due.
Today, the tax is popular. It makes up 30 percent of St. Louis’ budget, and due to a vagary in the law, St. Louis voters have to reapprove it every few years. If they fail, officials must go back to the Missouri legislature and essentially ask for permission to implement the tax again and figure out how to make the city run in the meantime.
But the earnings tax is so mundane a topic that a quarter of St. Louis voters turned out in 2016 to rubber stamp the measure. They passed Proposition 1 with a 30 percent margin of victory.
Dillon's home
St. Louis didn’t just give Seattle a template for its tax — it set the standard by which cities across the country could claim the authority needed to tax their citizens.
There are two main ways that states devolve powers to municipalities. There’s the “home rule” doctrine, which holds that cities have broad powers and the authority to perform most functions unless expressly prohibited by the legislature. Then there’s “Dillon’s rule,” which comes to the opposite conclusion — the legislature parcels out authority to cities like crumbs, and must grant municipalities special permission to assume new powers.
Missouri innovated the concept of the home rule city in its 1875 constitution, and St. Louis became the first example of a home rule city in the country. However, the designation didn’t come with blanket permission to tax, and eventually courts decided that because St. Louis’ earnings tax impacted people outside of city limits, the legislature had to weigh in.
It’s one reason that it behooves St. Louis to never let its tax lapse — if it does so, officials will have to go back to the legislature to try to get it back.
Washington also has a home rule doctrine enshrined in its constitution, which it got with a helping hand from Missouri.
Delegates at the Washington constitutional convention struggled with the idea of home rule in 1889. Opponents argued that municipalities shouldn’t have a constitutional right to their own charter and the independence thus conferred, but urban delegates believed that large cities didn’t have time to wait for the legislature to draft statutes governing their activities.
At that convention: Trusten P. Dyer, a delegate and attorney in Seattle. Dyer spent most of his life in St. Louis, and mentioned to a newspaper that the home rule “system worked well there.” While not everyone shared Dyer’s views, the home rule provision made it into the final constitution.
Seattle is a “first class” city in a state with a judiciary that oscillate between applying “Dillon’s rule” and “home rule,” leaving a jumbled track record in the courts. But Knoll Lowney and Claire Tonry of Smith & Lowney PLLC believe that the powers assumed under home rule could be a path to victory.
The legislature gave home rule cities taxation authority already, Tonry said.
“They are given by the legislature all of the powers that are not expressly denied,” Tonry said. “Here the legislature has expressly provided for taxation authorities and many other powers provided to cities.”
For decades, municipal attorneys have relied on a King County court case, King County v. City of Algona, to assert that they do not have full taxing authority, Lowney and Tonry wrote in a memo to John Burbank of the Economic Opportunity Institute. But that decision prevented the city of Algona from applying a tax on King County functions, specifically a business and occupation tax levied against the county’s solid waste transfer station.
Instead, the pair argued, Seattle should rely on a different case, City of Wenatchee v. Chelan County Public Utility District Number 1. Wenatchee clarified the Algona decision, saying that municipalities needed express permission from the legislature if they wanted to tax other municipalities. An income tax, however, could be permissible if Seattle has an “express grant of general taxing authority.”
Seattle already has the authority to levy excise taxes and “all powers of taxation for local purposes” within constitutional limits, the authors write.
To make it work, courts would have to accept that an income tax is a form of excise tax, which they have so far refused to do.
To make it work, courts would have to accept that an income tax is a form of excise tax, which they have so far refused to do, and proponents would need to engage in semantic jiu jitsu to avoid or invalidate a law passed by the legislature prohibiting a tax on “net income.”
Olympia attempted the excise tax argument in its local income tax initiative in November 2016, but it went nowhere when the measure failed at the ballot box. The “adjusted gross income” strategy was baked into Initiative 1098, a 2010 attempt at a statewide income tax, also drafted by Lowney, that was approved in Seattle but lost overall.
The strategy is not without risk, they write.
“Even if Wenatchee governs the issue, its application to this situation presents a question of first impression and therefore victory is not guaranteed,” the attorneys said.
The road ahead
It’s clear that Seattle’s tax warriors have much to overcome if they want a victory in the courts, and their opponents will not make it easy on them.
Since courts struck down the 1932 income tax, Washingtonians have voted on some form of income tax or other nine times. Each time, voters rejected it. The legislature took steps in 1984 to close the door on the topic, passing a ban on income taxes imposed by a county, city or joint city-county government. That law, too, would have to be defeated.
Lund, of the Freedom Foundation, is confident that their challenge, when it’s filed, will prevail. Unlike pro-tax supporters, the Freedom Foundation and the coalition of anti-tax individuals and groups that it’s cobbling together do not have to develop an innovative legal strategy, they just have to hold on.
“It would be very disappointing that previous court decisions including Supreme Court decisions would somehow be interpreted differently,” Lund said. “What that suggests is that politics affects justice. I don’t expect that of the Supreme Court.”
Burbank certainly does.
“It will take the Supreme Court to review a decision from 82 years ago to open up to the progressive and robust taxation that we need,” Burbank said.
“The interesting thing about this is when we had an economy that had a robust middle class with high union organization and membership and we had income concentrate in the middle, then we could get away with a system based on property tax and have money for good public services,” Burbank said.
With two of the wealthiest men in America living in Washington and the resentment building over the wealth gap between newcomers and Seattleites, it’s little wonder that sentiments are rising to redistribute some of that money.
That’s certainly not the situation now, where Washington has to fight tooth and nail to fund even basic things like education and wealth across the country pools at the top. The federal marginal tax rate reached 91 percent for a decade in the 1950s and 1960s before dropping precipitously over the years and bottoming out around 25 percent.
Since 1945, average real income has doubled overall, but it quadrupled for the top .1 percent of households and gained almost 700 percent for the top .01 percent of households.
With two of the wealthiest men in America living in Washington and the resentment building over the wealth gap between newcomers and Seattleites, it’s little wonder that sentiments are rising to redistribute some of that money.
“We are in a perpetual fiscal crisis whether we are in a recession or in an economic boom. The only way to get around that is to put in a statewide progressive income tax,” Burbank said. “Absent a state income tax, we won’t get there.”
*The online version of this story is more in depth than the print edition.
Ashley Archibald is a Staff Reporter covering local government, policy and equity. Have a story idea? She can be can reached at ashleya (at) realchangenews (dot) org. Twitter @AshleyA_RC
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