Seattle’s income tax could serve as test case for other Washington cities

Update: A King County Superior Court judge ruled against Seattle on Nov. 22.

Update: A King County Superior Court judge ruled against Seattle on Nov. 22. Read more here.

As the city of Mercer Island faces looming budget deficits and serious questions about its financial future, the city of Seattle is on its way to adopting a measure that could impact all cities statewide: an income tax, on high earners.

The tax, which the Seattle City Council passed unanimously in July, applies a 2.25 percent tax on total income above $250,000 for individuals and above $500,000 for married couples filing their taxes together. It has been called “progressive” by supporters and “blatantly illegal” by opponents, and has invited several lawsuits.

The measure could serve as a legal test case for taxing income in Washington, and possibly open the door for changes to the state’s tax system. It is heading to King County Superior Court on Nov. 17, where the city will have to defend the tax against groups such as the Opportunity for All Coalition. The coalition is supporting the primary legal challenge to the “illegal and unnecessary” Seattle income tax, which it says “poses a threat far beyond the city limits.”

Mercer Island resident Tim Punke, who works for Monument Policy Group and the coalition, said the outcome of the case could affect all cities in Washington, and that there’s “no guarantee that it wouldn’t get moved on to all income levels over time.” He said the Seattle tax will already affect people of more modest means who sell their homes or businesses.

Punke said that there has been an appetite in Olympia for an income tax. Voters have consistently rejected it, most recently by a two-to-one margin in 2010.

The issue will likely be taken up and resolved by the state Supreme Court, possibly as early as 2018, as a non-uniform tax was ruled unconstitutional in Washington.

Punke said that there may be a need to address the tax system holistically, as Washington is considered one of the most tax regressive states in the U.S. An income tax could be balanced by reductions in property or sales taxes, for example. But that wasn’t part of the conversation among the Seattle City Council, he said.

“There’s never been any suggestion at all that this tax would be used to offset other taxes,” Punke said.

According to the Seattle City Council, the tax will be used for: “lowering the property tax burden and the impact of other regressive taxes; addressing the homelessness crisis; providing affordable housing, education, and transit; replacing federal funding potentially lost through federal budget cuts, including funding for mental health and public health services; creating green jobs and meeting carbon reduction goals; and administering and implementing the tax.”

The push for the tax started when local nonprofits and labor unions, calling themselves the Trump Proof Seattle coalition, began a campaign to tax the rich to offset federal funding cuts by the Trump administration. The nonprofit Economic Opportunity Institute also expressed interest on working with Seattle on such a measure.

“In enacting it, the Seattle City Council chose to ignore state law, nearly a century of legal precedent, 10 statewide popular votes against similar ideas and the Washington state Constitution,” stated Matt McIlwain, founder of the Opportunity for All Coalition.

Other opponents argue that this tax, along with a recently-proposed business head tax in Seattle, will make the state less competitive. The move by Amazon to consider alternative locations for HQ2 has put an additional spotlight on the issue.

“While cities across the country roll out the red carpet for this innovative and rapidly growing company, Seattle’s City Council cannot even agree that a long-term strategy of partnering with Amazon and other growing business will continue to help the overwhelming majority of citizens in our community,” McIlwain stated. “Ironically, in the Puget Sound region’s own pitch for HQ2, they even highlight the lack of an income tax as a key reason to be here.”

The Seattle Weekly, one of the Mercer Island Reporter’s sister publications, talked to lawyers on both sides before the upcoming hearing, and did an FAQ when the tax was proposed in May, as legal challenges were expected.

The issue has come up in other cities. In August, New York Mayor Bill de Blasio proposed taxing the wealthy to help fix the city’s ailing subways. He wanted to raise the city income tax on people who earn more than $500,000 per year and couples who make more than $1 million.

Punke said that the election of a Democrat in the 45th District, which would give the party a one vote majority in the Senate, could also affect tax policy. Manka Dhingra (D) won the race, but told the website Ballotpedia that she does “not support the implementation of a state income tax and that such a policy [has] already been deemed unconstitutional.”

“She is quoted asserting that the income tax issue ‘is not a realistic conversation’ unless state supreme court precedent is overturned or a voter initiative is successful,” according to the site.

Mercer Island, and other cities in Washington, are limited in their ability to raise revenue because off a measure that caps property tax increases at 1 percent per year, without voter approval. But the city’s costs are rising at a much higher rate, creating a “structural imbalance.”

There is only one way the city’s property tax levy can increase more than that: the voters have to approve a property tax increase via a levy lid lift, or an excess levy (sometimes called a bond levy).

The city of Mercer Island has considered a capital levy and an operating levy lid lift as it addresses its financial challenges. The recently-appointed Community Advisory Group (CAG) will “review in-depth financial data, discuss the challenges and solutions, and provide a recommendation” over the next few months.

Several other ideas have been discussed on social media, including imposing an income tax, auditing city departments and leaving the King County Library System. Council member Dan Grausz noted that previous councils have looked at other service delivery models, such as creating a regional fire authority with Bellevue or contracting police with the King County Sheriff.

See www.mercergov.org/FinancialChallenges for more.

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