Washington State Judge Opens the Door for Income Taxes

July 19, 2019

The legal dam against state and local income taxes in Washington state has sprung a leak. On July 15, a division of the Washington Court of Appeals issued a surprising ruling teeing up for the State Supreme Court an opportunity to reconsider a longstanding constitutional precedent prohibiting nonuniform taxes on income.

The case involved a Seattle income tax levied on high-income city residents. The tax was successfully challenged at the trial court on the grounds that Seattle lacked both the statutory and constitutional authority to levy income taxes.

On appeal, Judge James Verellen affirmed the tax’s invalidation but did so solely on constitutional grounds, paving the way for the State Supreme Court to weigh in.

The state constitutional provision at issue requires that taxes on property be uniform. The court dutifully applied longstanding State Supreme Court precedent holding that income is property. Because Seattle’s tax applied only to some taxpayers, the tax violated the constitution’s uniformity requirement.

The statutory argument centered on a state law enacted in 1984 that prohibits any city from levying “a tax on net income.” The city attempted to construe the tax as one on gross income rather than net income, but the court rejected that characterization.

In an unexpected twist, the court held that the 1984 restriction is unconstitutional. The court invalidated the law under the “single subject rule,” which requires pieces of legislation to “embrace [no] more than one subject.” Judge Verellen reasoned that because the bill included the net income tax prohibition along with provisions relating to police collective bargaining, pension and disability benefits, and state revenue calculations, the bill’s components lacked a “common unifying theme.” Holding otherwise would “set a low bar for rational unity and fail to uphold the purposes of [the single subject rule].”

This issue was not a major focus of Seattle’s arguments, and the single subject rule is typically a long-shot losing argument. Instead of characterizing all the subsections as generally related to municipal government, perhaps a more persuasive unifying theme is that all serve as clarifications to an unclear constitutional amendment passed in 1972 relating to the powers of city-counties. That still may be too tenuous a connection for a judge, especially considering that the net income tax prohibition is the only subsection that does not apply exclusively to city-counties.

It is unusual that this law was struck down on procedural grounds over thirty years after enactment. In fact, there is no Washington case in which a single subject rule challenge was made, let alone upheld, this far after enactment. This suggests that Judge Verellen wanted to remove this statutory obstacle so that the State Supreme Court could squarely consider the constitutional precedent.

The statutory holding will be central to an appeal and provides the State Supreme Court with an outlet if it does not want to reach the constitutional question.

This case carries two significant implications for Washington tax policy.

First, local governments can levy flat taxes on net income. The court identified a general statutory grant of taxing power to municipal governments for local purposes. It remains to be seen whether—and to what extent—cities, counties, and city-counties would exploit this new authority given that they are restrained by a 1 percent cap on such taxes, part of which is already consumed by traditional property taxes.

Second, and most importantly, the precedent that income falls under the constitutional definition of property is in danger.

The first case holding that income is property dates to 1933 and has been reconfirmed several times. Stare decisis is firmly on the side of the taxpayers, so any decision overturning that holding would likely be perceived as an extreme judicial step.

Even if the State Supreme Court gives no weight to the precedent, a fresh review of the issue would have to confront the remarkably broad constitutional language. The constitution defines property as “everything, whether tangible or intangible, subject to ownership.” Up to this point, the court has concluded that income is subject to ownership and, therefore, property taxable only at uniform rates.

As a practical matter, the uniformity requirement functionally limits the legislature from enacting an income tax. Such a tax would have to be a flat tax without deductions, exemptions, or exclusions. Washington voters have repeatedly rejected proposed constitutional amendments authorizing nonuniform income taxes.

The State Supreme Court may end up saving the legislature from the political hassle by judicially authorizing an income tax, but doing so would be a drastic reversal of precedent and give the appearance of bending constitutional law to policy preferences.

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