Seattle creates waves by passing tax on high-income earners
In what Mayor Ed Murray has called a “new formula for fairness” and a challenge to the state’s “antiquated and unsustainable tax structure,” Seattle recently became the first local jurisdiction in Washington state to pass an income tax when it was approved by city council and signed by the mayor in mid-July.
Beginning Jan. 1, 2018, Seattle residents with incomes in excess of $250,000 ($500,000 for married couples filing jointly) will be subject to a tax of 2.25 percent on income exceeding those thresholds. Qualifying taxable income may be earned or unearned. For example, if an individual earns a salary of $300,000, and has a gain from other sources of $100,000, the resulting local tax would be assessed at 0 percent on the first $250,000 and 2.25 percent on the remaining $150,000, or a total tax liability of $3,375
Currently one of seven states that impose no personal income tax, many believe the Seattle tax to be in violation of the state’s constitution, which requires all taxes to be uniformly imposed upon the same class of property. That provision may be violated because, at the very least, the tax is imposed only on incomes above a certain threshold, leaving lower incomes unburdened. Additionally, the Washington legislature has expressly prohibited counties and cities from imposing a “net income tax.”
A complaint filed on the day the law was signed challenges the legality of the Seattle income tax under both the state constitution and state statutes. A long history of state case law addressing income taxes may suggest the law is unconstitutional. The complaint also alleges that the tax is on net income and thus directly in violation of state law. While the legality of the law can be debated by lawyers and tax professionals, it is becoming clear that this will only be resolved inside a court room. Seattle-based high-income earners should consider the matter far from over and anticipate developments in the next six months.