Seattle will hold public hearing today on municipal income tax of doubtful legality; 2 percent tax on income above $250,000

The Seattle Times reports that the Seattle City Council is taking more steps to impose a municipal income tax

Seattle residents would pay a 2 percent tax on annual income above $250,000, under a proposal the City Council will begin considering this week.

Married residents filing their taxes jointly would pay it on income above $500,000.

Those details are included in a draft ordinance that Councilmember Lisa Herbold made public Monday. The council will hold a public hearing on the bill at 5 p.m. Wednesday at City Hall.

As we’ve written, the local income tax faces major legal hurdles.

Former state Attorney General Rob McKenna and former state Supreme Court Chief Justice Gerry Alexander think the proposition will not be put to the test, however. In a Seattle Times op-ed, they write,

Now, Seattle City Council wants to pass an illegal income tax, mincing no words in a May Day resolution that it intends to adopt a citywide income tax by midsummer. This proposed measure ultimately will fail.

They cite the state constitution, statute, and court precedent to back up their analysis.

From the Seattle Times story,

The council estimates that tax would raise about $125 million annually and says fewer than five percent of the city’s households would pay.

There were about 11,000 individuals in Seattle with earned annual incomes of at least $250,000 in 2015, according to U.S. Census Bureau data.

The story also reviews the legal hurdles, noting that proponents are hoping the current Supreme Court would reject precedents and “interpret the constitution differently.” `

Seattle Met reports on the council’s approach.

Council member Lisa Herbold has said the decisions will be based on whatever provides the “strongest legal path forward.” Yes, that did end up going beyond unearned income, and exempts certain sources of earnings—like any revenue, wages, or gains that came from outside the city, or income that’s already been taxed by state or local jurisdictions. (And the legislation will get challenged—here’s a reminder of what the legal fight will look like.)

It also seems to address the 1984 state statute that explicitly prohibits a “net income” tax. The ordinance said the city council has “all powers of taxation for local purposes except those which are expressly preempted by the state.”

“Any sources of income included in income reported on a resident taxpayer’s federal tax return that the laws of the United States prohibit cities from taxing, or that a court with jurisdiction to bind the city has determined cannot lawfully be included, shall not be included in a resident taxpayer’s total income,” the ordinance reads. 

Our earlier post noted the likely negative impact such a tax would have on the city’s economic growth.