Stranger Things: Appeals Court finds that Seattle graduated income tax is unconstitutional, but says cities may tax income.

The state Court of Appeals got Solomonic today, splitting its decision to hand both opponents and proponents of municipal income taxes a win. A couple of headlines tell part of the story: 

Seattle Times: State Court of Appeals rules Seattle’s wealth tax is unconstitutional, but gives cities new leeway

MyNorthwest: Court rules Seattle can impose an income tax in stunning decision

The Lens headlines writer probably says it best: Seattle income tax set for high court showdown

The city’s quixotic pursuit of the income tax continues. The state Supreme Court, as Lens reporter TJ Martinell writes, will have its say. And for the city, that appears to be a win.

In a new ruling the Washington State Division 1 of the Court of Appeals has struck down the city of Seattle’s 2017 local income tax ordinance. However, the July 15 decision also declared a 1984 state law banning local income taxes to be unconstitutional. It’s a matter now for review by the State Supreme Court, which has been one of the objectives sought by the tax’s supporters.

In an email to Lens, plaintiff attorney Matthew Davis wrote that the court “will wreak havoc” as a result of its ruling. “The Supreme Court will have no choice but to take the case.”

The bottom line from the decision:

We conclude Seattle has the statutory authority to adopt a property tax on income, but our state constitution’s uniformity requirement bars Seattle’s graduated income tax. Therefore, the Seattle income tax ordinance is unconstitutional.

The critical and surprising element was the ruling that the bill prohibiting a local income tax violated the single-subject rule and was, therefore, unconstitutional. After analyzing the legislation, the court concludes,

Because it is impossible to assess whether the broad prohibition on net income taxes would have passed without the bill’s unrelated provisions, SSB 4313 violated the single subject rule in article II, section 191..

The overall conclusion:

Article VII, section 1 of our constitution, as interpreted by Culliton, considers income to be intangible property, so a tax on income is a tax on property. Arguments to the contrary can be resolved only by our Supreme Court.

In this case, the legislature granted Seattle authority to tax intangible personal property, including income, under either RCW 35.22.280(2) or ROW 35A.1 1.020. RCW 36.65.030 prohibits any municipal levy of a net income tax. But the enacting bill for ROW 36.65.030 violated the constitutional prohibition in article II, section 19 on legislation with more than a single subject. Consequently, ROW 36.65.030 is unconstitutional and no statutory prohibition limits Seattle’s authority to levy a property tax on income.

Under the doctrine of stare decisis, we are bound by our Supreme Oourt’s precedential decisions that a tax on income is a property tax and that a graduated income tax violates the uniformity provision of article VII, section 1. Because Seattle enacted a graduated tax on income, it is unconstitutional.

The Seattle Times reports,

On Monday, the Court of Appeals weighed in, reaching a different conclusion than the lower-court judge. Though Seattle’s measure does violate the ban on cities taxing net income, the ban itself is unconstitutional because the Legislature made a technical error in 1984, the Court of Appeals determined.

The Legislature included the ban in a law that also covered multiple other subjects, breaking a constitutional rule that says “no bill shall embrace more than one subject,” according to the Court of Appeals.

“No statutory prohibition limits Seattle’s authority to levy a property tax on income,” Judge James Verellen wrote for the Court of Appeals.

And also quotes Davis,

Matthew Davis, lawyer for one of the Seattle residents opposing the city’s tax on wealthy households, said this of the Court of Appeals’ decision to nix the Legislature’s 1984 ban: “I was giving that argument a zero percent chance of success.”

So, the city is where it wants to be.

Seattle now intends to again ask the Supreme Court to review the case, said Dan Nolte, spokesman for Seattle City Attorney Pete Holmes. With the statutory question cleared by the Court of Appeals, the city will try to persuade the Supreme Court to overturn past rulings on the constitutionality of taxing income.

“We’re pleased that the Court held the City had the statutory authority to enact an income tax,” Nolte said in a statement.

“The City has always recognized that ultimately the Washington State Supreme Court is the proper place to overturn the bad precedent holding an income tax is a tax on property.”